What is a Contract for Deed?
In Illinois, a contract for deed is also commonly known as an installment land contract or agreement of sale. These contractual agreements set up the terms for a real estate transaction between a buyer and a seller. Typically, the buyer will make monthly payments to the seller over an agreed-upon period of time (such as 30 years), like a mortgage. Until the seller has been paid in full, however, the seller holds the title to the property. Once all payments are successfully made, they will transfer the deed to the buyer.
By contrast, in a traditional purchase and sale transaction, the seller signs the deed transferring the property to the buyer. In that type of case , the buyer will obtain a loan and make monthly mortgage payments to the bank until the loan is paid off and the title and deed belong directly to the buyer.
Because the seller maintains ownership of the property through a contract for deed, the buyer does not bear much responsibility for the property other than to make the monthly payments on time. This means the seller of the property is still responsible for all property taxes, insurance, maintenance, repairs, etc. The agreement of sale may specify what, if any, responsibilities the buyer has for maintenance and repairs.
Contract for deed agreements have the reputation of being a good option for those who have a poor credit history, as the seller of the property is usually willing to overlook poor credit in exchange for the ability to receive regular monthly payments on the property.
The Legal Framework in Illinois
The legal framework in Illinois is defined primarily by a series of statutes that govern the transactions, particularly in regard to foreclosure. The Illinois Mortgage Foreclosure Law, 735 ILCS 5/15-115, contains a subdivision addressing "Land Trust and Land Installment Contract Foreclosures." This subdivision applies only to contracts that are less than one year old. The Illinois statute allows the right to possession of the property "immediately," which is somewhat clearer than the Uniform Act. The Illinois Mortgage Foreclosure Law section on contracts for deed grants the homeowner the right to a grace period and a chance to redeem the property post foreclosure.
In Illinois, this grace period is known as the right to "cure" a default on the contract for deed. A default is the failure to fulfill a promise in the contract for deed, considering the circumstances and the terms of the contract, which includes the specific time provided for performance.
There are no statutory requirements relating to the specific terms or disclosures that must be provided in a contract for deed. In the absence of any such requirements, the courts have to determine how to resolve contract for deed disputes according to the terms of the contract which are interpreted according to general and established rules on contracts. This means that the parties’ agreement may not always be upheld if it is not consistent with the law, public policy, or good morals, as laid out in 5 ILCS 111.01.
Buyers are not required to make a down payment, but should not transfer all rights to the property at the outset. Depending upon the total purchase price of the property, the proposed state law for a contract for deed may have some rigid limitations on when payments can be declared late and foreclosure becomes effective. The modern uniform act grants the homeowner the right to possession of the property 120 days after default under the contract. If a substantial right of the buyer would be extinguished by a foreclosure sale, the buyer has a right to be awarded possession during the redemption period. Post foreclosure, the homeowner may continue to redeem the property under the Illinois Mortgage Foreclosure Law for six months (735 ILCS 5/15-1603).
Many provisions of the Uniform Act are not included in the Illinois Act, such as: (1) a requirement that the judicial sale price must equal at least 60% of the fair market value; (2) a method of protecting the buyer during and after foreclosure through an order establishing the fair market value; and (3), a bar on waiving a legal defense to foreclosure in connection with a contract for deed.
Benefits and Risks
The benefits of a Contract for Deed include the following:
- Seller Benefit: The Contract for Deed allows a Seller to sell a home without listing the property with a broker, pay broker’s commissions, or wait months for a sale to be finalized.
- Seller Benefit: The Seller may be able to keep the sale price and payments from the Buyer, depending on the type of judgment rendered by the Foreclosure Court.
- Seller Benefit: The Seller may avoid attorney fees from a judicial foreclosure through a non-judicial foreclosure that is less expensive.
The Risks of a Contract for Deed include the following:
- Buyer Risk: The Buyer runs the risk of losing both the property and the down payment if the Seller defaults or the property is foreclosed.
- Buyer Risk: The Buyer should be aware that if the Seller files a Bankruptcy Petition, the court may treat the payments as rental payments rather than payments on a mortgage loan.
- Buyer Risk: The Buyer may not receive an equity interest in the property until a satisfaction of contract is recorded with the Recorder of Deeds.
Key Components of a Contract for Deed
Contracts for deed must contain the following elements:
Payment toward purchase price: The agreement must provide that a portion of each installment payment is applied to the purchase price. The payments should be structured to include an interest payment, as well. If no portion of each installment is applied to the purchase price, then it is an option to purchase rather than a contract of sale. This is an important distinction because contracts for deed are considered executory contracts of sale and therefore must adhere to the statute of frauds.
Payment to seller as mortgagee: The seller, as mortgagee, holds bare legal title to the property until the buyer pays the purchase price in full. During the term of the contract, the seller must accept installment payments from the buyer as mortgagee at an interest during the term of the contract at a rate that is no more than 5 percent higher than the highest legal rate of interest for the year in which the contract is made, or, if the parties agree, the highest lawful rate of interest. The interest must be based on the unpaid balance of the contract amount, not the original value of the property. While the seller/mortgagee may agree to forgive the full amount of the interest at the end of the term, there must be a mechanism for payment of the interest during the term. Many contracts for deed include provisions for monthly installment payments of interest and a balloon payment at the end of the term.
Default provisions: If the buyer defaults under the contract, the seller has the right to foreclose on the property. There is no need to file an action for a judgment of foreclosure and sale. The seller may enter the property and evict the buyer, and the buyer will receive back any principle amount collected plus interest paid.
How to Draft a Contract for Deed
An attorney should draft the contract for deed as the terms of contract for deed are typically longer than the attorneys involved. There are essential documents that should be attached to a written contract for deed. These are the warranty deed (which is executed at closing), mortgage, lien and title policy. The contract for deed should also be filed with the county recorder or registrar’s office. Without filing, the contract for deed will be unenforceable against the buyer if the seller sells the property to a third party purchaser . If the buyer applies for financing in the future, the buyer will need to record the contract for deed with the lender.
Any competent real estate attorney can draft a contract for deed. While there are some standard provisions that are essential, each contract for deed needs to be customized to the deal at hand, including the parties, the purchase price, the date of last payment and any terms specific to the transaction.
If possible, you should have your contract for deed reviewed by a real estate attorney. This reflects best practices and will prevent future legal issues.
Where to Find Contract for Deed Templates in PDF
Contract for deed templates are generally available in PDF format. The same information that is in a contract for deed PDF can often be found on legal document Web sites. Contract for deed templates can be downloaded directly to your computer and modified using standard word processing software.
Contract for deed templates are available from a number of different sources. Many real estate forms Web sites will make a contract for deed template in PDF format available for download. These contract for deed templates are of use because they can save the drafter considerable time in drafting a contract for deed. The basic information that is needed for a contract for deed is included in the form. The basic terms of the contract for deed may be filled in. The general sections, such as the covenants section and section providing for remedies upon default provides sufficient information to allow the drafter to include the appropriate legal language. The contract for deed template can be downloaded from the legal document Web site, allowing you to either complete the text on your own or print a draft to complete. The basic terms can then be modified to suit the parties if necessary.
In Illinois, contract for deed templates can be found in a number of different real estate and legal forms Web sites. The various options are easy to find using any Internet search engine.
Alternatives to a Contract for Deed
Alternative Options to Consider in Lieu of a Contract for Deed
One alternative to a contract for deed is a lease with the option to purchase. A lease with option to purchase or "lease to own" is a more formal form of an installment contract and it is used for one particular purpose: to allow a tenant of real property to purchase the property they are leasing once certain conditions are satisfied or upon the expiration of the term. The main differences of a traditional lease when compared with a lease to own option contract are: Generally, this type of agreement is preferred over a contract for deed because of its clarity, especially in the real estate industry. This type of agreement also affords both the tenant and the landlord with added flexibility.
Oftentimes, a traditional form of financing may be preferable and work better for both the purchaser and seller. If the prospective buyer has good credit and stable income, traditional financing may be a more suitable alternative. Traditional financing can also protect the purchaser because the deed would not be given to the seller until the price is paid in full or otherwise transferred to the buyer. When purchasing through a seller via a traditional home sale, you are obtaining the home after a complete close of escrow with all funds transferred. There are two types of traditional financing: institutional and owner financing. As institutional lenders require a down payment of approximately 10-20 percent of the total price of the home, a substantial amount of cash is often required to close the deal. However, in most cases, as long as you meet the lender’s requirements and are able to provide sufficient documentation, institutional financing is the quickest and most straightforward method of purchasing property. Owner financing is a type of real estate sales transaction whereby a buyer finances their mortgage through the seller rather than a financial institution. Financing through an owner may be beneficial to a purchaser because the down payment is usually lower and the interest rates offered by the seller are often less than what a traditional lender would have provided. While owner financing may afford you a more affordable home loan, oftentimes, an owner could seek inadequate financing terms, which could lead to significant financial trouble later down the line. Moreover, if a seller defaults on the loan, the bank may foreclose on the property and you may lose both your home and whatever you have already paid the seller. In general, however, owner financing is a viable option if you have been unable to secure traditional financing.
Real-Life Example: A Case Study
A case study that illustrates the process and potential pitfalls of contract for deed in Illinois is the experience of Ana, a Chicago-based entrepreneur who wanted to purchase her first home. Ana had limited savings and an average income, but she was determined to find a way to secure a home for her family.
She began by working with a real estate agent who specialized in alternative financing options such as contract for deed. The agent connected her with a local owner of commercial real estate who had several properties up for sale. The owner agreed to enter into a contract for deed with Ana, and they settled on a property in the neighborhood of her choice.
The property was an older single-family home that needed some cosmetic repairs. The terms of the contract stated that Ana would pay $120,000 for the home with a 10% down payment of $12,000. The remaining $108,000 would be financed at a 6% interest rate, and Ana would make fixed monthly payments for 10 years, at which point the remaining balance would be due. She was also responsible for any taxes and maintenance on the property.
Ana made the down payment to the owner, and the two entered into a legally binding contract. The owner agreed to allow Ana to move into the property and treat it as her own. He also agreed to hold onto the title until the full amount of the purchase price, including interest, was paid.
Due to the unique nature of the transaction, Ana and the owner used a standard set of documents modified to suit their arrangement. The contract included details about payment schedules, maintenance responsibilities , and what would happen in the event Ana defaulted on the agreement. Ana and the owner each retained copies of the contract and agreed to hold each other accountable to the terms within it. Ana made sure to have her attorney review the contract before signing. Ana moved in and began making monthly payments.
Several months into the agreement, Ana and her family were celebrating the holiday season, when a fire broke out in the basement due to a faulty furnace. The damage was significant and required expensive repairs. Ana contacted the property owner to request assistance with the bill, but he refused, citing his position as the legal owner of the home. Ana did not have the funds to cover the repair expenses and had to borrow money from friends and family to avoid losing her home.
Shortly after the repairs were completed, Ana lost her job. She used her savings to make the mortgage payments for a few months, but eventually ran out of money and could not complete her payments. She was fearful of losing both her money and her home.
She contacted the owner about the situation, but he refused to renegotiate the terms of the contract. Instead, he began the process of foreclosure. These included:
Ana was devastated to learn that she was about to lose both her home and her investment. After consulting with her attorney, Ana decided to fight back. She filed a lawsuit against the owner, asking the court to modify her payment obligations and avoid foreclosure.
The parties ultimately agreed to a settlement by which Ana would sell the property to a third party for $85,000, who would then pay off Ana’s outstanding debt to the owner. The owner reluctantly agreed to accept the lower payment and called off the foreclosure.
In this case, concept was fulfilled: Ana accomplished her goal of becoming a homeowner – even if only for a short period of time.