In the April, 2010 newsletter, I addressed the benefits and drawbacks of the lease option agreement.  This article will analyze a related, but different transaction – the contract for conveyance.  Such sales transactions have many different names – contract to convey, contract for deed, contract to convey, and agreement for sale to name a few of the most common names.  The name of the document isn’t important.  A contract for conveyance exists when a buyer pays set amounts towards the purchase price and is entitled to title of the property once they have paid the remainder of all monies due under the contract.  As analyzed in April’s newsletter, in a contract for conveyance you have a buyer and seller and not a landlord and tenant.  

             Overview of Transaction.  A contract for conveyance is generally used when a buyer wishes to purchase a home, but is unable to afford traditional financing.  The typical contract for conveyance is where the buyer pays a down payment, pays a monthly amount of the purchase price (PITI) and pays a balloon payment within a specified time period (often 3-5 years).  The parties should name a servicing agent to receive and disperse the payments and act as an agent for other contractual provisions.  Until full payment is made, the seller retains legal title to the home and the buyer has equitable title.  Once the final payment is made, the buyer receives legal title to the home. 

             Investor Benefits of the Contract for Conveyance.  A contract for conveyance allows an owner to put an occupant in the property on monthly payments while contracting to sell it at the same time.  While a seller retains legal title to the property under a contract for conveyance, many ownership obligations can be transferred to the buyer, including the duty to maintain all aspects of the home.  As a seller (not landlord), the owner is not bound by the Residential Landlord Tenant Act, and he need not ensure that the property is in a “fit and habitable” condition.  A seller can provide that the property is being purchase in “as is” condition and that the buyer is liable to maintain and make any and all repairs necessary during the term of the contract.  Unlike a rental where the Landlord is required to make certain repairs, the contract for conveyance allows the Seller to receive monthly payments “hands-free” of any maintenance requirement. 

 If completed, a contract for conveyance can offer both parties the benefit of a sales contract while avoiding some of the hurdles of a traditional sale.  The buyer can pay up front money and immediately obtain a vested interest in the property, despite maybe being unable to currently qualify for traditional funding.  These transactions can actually be used to help build the buyers credit to obtain future traditional financing.  The owner gets the benefit of a maintained property, while receiving a potentially large down payment, regular monthly payments and a balloon payment. 

             Primary Disadvantage. The main disadvantages of a contract for conveyance arise when a buyer defaults on the contract.  This is because the buyer has an equitable interest in the home, and the process to terminate that equitable interest can be lengthy depending on the percentage of the sales price paid.  It is different from a defaulting tenant who can be summarily evicted.  A seller must complete a forfeiture, foreclosure or quiet title, depending on how the contract was drafted.  The length of time to terminate the interest will depend on how much money has been paid.  For example, if a buyer has paid between twenty to thirty percent of the contracted price, it will take at least 80 days to complete the forfeiture after a default.  Only after the forfeiture is completed, can the seller file an eviction to obtain possession of the premises.   

             When drafting a contract for conveyance, it is important that an account servicing agent be listed.  They can handle all of the payments between the parties, and record the necessary forfeiture documents with the county in the event of a default. 

             Also, be careful when creating the documents.  Many investors believe that they have lease options which allow them to evict the tenant, when in fact they have created a contract for conveyance and the tenant has obtained an equitable interest in title – remember the court is not bound by the name you put on the document.  When it comes to real property transactions, the phrase “spend a little and save a lot” applies.  Have your contracts reviewed by an attorney before there is a problem that only years of litigation and thousands of dollars can fix.