Contract for Deed and Installment Sale Agreements
You may have read the New York Times article entitled Contract for Deed Lending Gets Federal Scrutiny. The Times reported that the Consumer Finance Protection Bureau (CFPB) is looking into whether a commonly used technique for the sale of residential real estate known as a Contract for Deed or Installment Sale Agreement may violate federal Truth in Lending laws. It is speculated that the CFPB is focusing on the increased use of this technique and abuses in the marketplace that target lower income buyers.
Up to now, the CFPB has focused on institutional financing and has not focused on the individual sale of houses by homeowners. The recent interest in these matters may be based on what the Times reports to be a widespread use of this technique in the mid-west and south where there are a large number of homes that sell for less than $100,000.00. The article points out that a firm in Texas, apparently, has become a national player in the Contract for Deed business.
The Contract for Deed or Installment Sale Agreement has been a commonly used method for inter-family transfers and for seller financing when conventional mortgages are either too difficult or too expensive to obtain. In recent times, we have not seen as many of these transactions as we did previously but that is probably due to the historical low interest rates being charged by conventional lenders.
In addition to the potential for enhanced federal scrutiny is the inherent problems in Installment Sale Agreements including the fact that most residential mortgages prohibit the sale of the home utilizing this transaction without the seller’s lender consent, which consent is often difficult or impossible to obtain. As a result of this, unwary home sellers can enter into these transactions and default not only under the Contract for Deed but also under their home mortgage simultaneously.
All of this points out why persons buying or selling what is often their most valuable asset should rely on professional advice in entering into contracts of this sort.