Follow These Guidelines

When you and the property meet the underwriting standards of a lending institution, favor that alternative unless the seller's terms look too good to pass up. If banks won't finance the deal, by all means consider using a contract-for-deed. Cash-short buyers can also win with this strategy: Buy a rundown property on contract. Then create value through improvements. Next, refinance based on the now-higher value of the property. If you use a contract-for-deed purchase, follow these guidelines:

♦ Buy the property, not the financing. Don't let easy credit lure you into buying an overpriced property. When circumstances warrant, you might in good judgment pay a price slightly higher than market value. But would you pay $6,000 for a 2000 Ford Escort from Easy

Ed's "buy here, pay here" used car lot just because Easy Ed will sell it to you with nothing down and low monthly payments? This same principle applies to property. Be wary of "You name the price; I'll name the terms." Verify value through an appraisal, comparable neighborhood sales, or other professional opinion.

  • Beware of hidden defects. A property that seems priced right might suffer hidden defects. Obtain knowledgeable estimates for repairs or renovations that you plan. Never ballpark or casually figure the costs necessary to bring a property up to the condition you want it. Get accurate property inspections and cost estimates before you buy.
  • Law regulates and governs installment contracts. A contract-for-deed places you and the seller in a relationship that is governed not only by the contract language, but by state laws and court decisions. Under an installment sale, your rights and responsibilities differ from those you acquire when you finance a property via a mortgage or trust deed.

Before you sign an installment sale agreement, consult a real estate attorney who is experienced in reviewing these contracts. Absent knowledge of this specialty, too many lawyers warn against buying a property on the installment plan. (Using similar logic, such lawyers would advise against marriage because divorce can cause such pain.) This type of lawyer fears risks apart from opportunities. Get a lawyer who understands both; then negotiate a contract that can work for you and the sellers. Over the years, millions of buyers and investors (especially those with low- to moderate-incomes or transient jobs) have successfully bought houses, farms, and small rental properties on the installment plan.

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