A Bond for Deed is actually a Deed in Trust and is used as a type of owner financing. It is in fact, an interim finance program whereby the deed is held in trust by a bonded attorney. Once all terms of the purchase contract have been fulfilled – the buyer has obtained his own mortgage, the seller’s mortgage has been cancelled, and the seller has been paid off in full – then the deed will pass to the buyer.
Why Sell Using a Bond for Deed?
With banks tightening their credit, and more and more consumers with impaired credit due to employment layoffs, etc., it is getting increasingly difficult to find qualified buyers. For other buyers, they may have a credit problem due to still being on the mortgage of a home that is now being leased, while needing to find a new home in another city.
These are very real circumstances that make the Bond a Deed a good interim solution for a buyer. while providing the seller who does not necessarily need to ‘cash out’ his equity, an opportunity to turn his home into an income/investment vehicle.
Recently, a seller we’ll call Mary, said she wanted to downsize. She was a widow, her home was paid for, and she was tired of trying to maintain a large yard. She wanted to simplify her life with a condo and do a little traveling.
Another seller, the Browns, found a waterfront home at a great price. They were able to handle the purchase without selling their current home first, so they jumped on it.
In both these scenarios, these sellers now had an opportunity to turn their homes into a money making machine.
Rent, Sell, or Owner Finance?
For these sellers, the decision to rent carried with it the risk of annual tenant turnover, damages to the property, and the on-going responsibility of the landlord for upkeep and repairs. Neither of these sellers wanted to be a landlord.
The most logical solution would be to sell outright, but the absorption rate of homes in their market was so slow, it meant their homes might be on the market a very long time. Then their agent suggested that these sellers consider owner financing using a Bond for Deed.
In Mary’s case it meant taking out a small mortgage on her home and using those funds to buy her new condo. She could move on immediately, and her new condo payment was more than covered by the money coming in from her buyer.
The Browns, on the other hand, had an empty house with a small mortgage remaining. Since it had been purchased many years prior, the house note calculated for their buyer more than covered their small monthly note.
For both sellers a Bond for Deed resulted in a much faster sale so they could move on.
What’s in It for the Buyer?
With tightened credit requirements, more and more home buyers are having difficulty qualifying for the typical mortgage loan. In some cases, it might just be that they haven’t been in their new job long enough. This is different from the type person who has low credit scores because he is just financially irresponsible. For the most part, their credit issues can be cured given the right amount of time.
For some people, renting just isn’t a satisfactory option. These are the type of people who take pride in home ownership. For them, the Bond for Deed is the perfect vehicle by which they can buy the home of their dreams now, and finalize the lending transaction in a year or so when their credit issues have been resolved. In the meantime, they will gladly re-landscape, repair, and otherwise maintain their new home.
How Does the Process Actually Work?
First of all, all parties must understsand this transaction is a formal ‘act of sale’ that takes place whereby all the necessary papers are signed for the buyer to take title, and the seller to pay out their lender. Except. . . The final step of actual deed transfer will be postponed (and the papers held in trust by the attorney) until the buyer obtains his own loan from a mortgage lender and the seller is paid out in full.
Part of the closing procedure will include a contract drawn up between the buyer, the seller, and a middle party called the ‘escrow company’. This contract is like a three legged stool. The buyer sends his payment to the escrow company, and they in turn pay the sellers mortgage each month. Any ‘overage’ or remaining funds, are then deposited to the seller’s personal bank account.
This process protects the buyer by insuring that the sellers mortgage will be paid on time and there will be no chance of default on the seller’s mortgage. It also relieves the seller of tedious paperwork since it is the escrow company who prepares the buyers interest calculations (for IRS purposes) at the end of the year, and the seller’s interest income for reporting purposes.
What are the Advantages to the Seller?
Besides the obvious advantage of being able to sell their house and move on with their lives, sellers will often make back the amount of their closing costs within the first twelve months. Here’s how. . .
From a purely cash flow standpoint, the seller should ask the buyer for at least 7%-8% down. He will then use the funds from the down payment to fullfill his contract obligation to his real estate broker. From the buyers point of view, this down payment is being applied directly to principle.
Now here’s the good news. If the seller charges the buyer 6.5% interest on the financed portion of the purchase (the part remaining after the down payment), in 12 months he can actually recover the cost of his selling commissions. What other buyer sells his home, then makes enough interest off the sale to pay himself back those costs in just 12 months!
What if the Buyer Doesn’t Pay?
This is not a casual lease/purchase type transaction. Unlike a lease, the seller does not need to go through tedious maneuvers to comply with ‘tenant rights’ because the buyer is not a tenant. Just as with any mortgage, If the buyer misses a payment, he is automatically in default of the contract. He can therefore be evicted according to the terms of that contract, and the seller can take back control of the property.
Can the Buyer Make Permanent Improvements or Modifications?
This is just one of many items that should be discussed when drawing up the Contract. In the case of a property in need of a lot of repairs, the seller might give the buyer cart-blanc to make any improvements or modifications deemed necessary. Other sellers might prefer to include a clause that, except for repairs, major modifications (such as room additions or kitchen remodeling) are to be presented to the seller in writing for formal approval. This is why only an attorney experienced in doing these type contracts should be used to draw up a Bond for Deed.
Can the Buyer Re-Sell the Home Prior to the Ending Contract Date?
In a word, Yes. In a rising market, or when buying a distressed property, a buyer may purchase a property for a low price using a Bond for Deed, make repairs and improvements, and then contract to re-sell the property to a third party. When this happens, the closing attorney will simply need to coordinate the finalization of the Bond for Deed with the second sale so that all contracts and obligations are satisfied at one closing.
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Disclaimer: This article is intended for general information only. The author is not an attorney, and this article is not intended to convey legal advice. Anyone wishing to explore the use of a Deed in Trust should consult an attorney in their own jurisdiction to assure compliance with all local and state laws governing such transactions and contracts.