Understanding Contract for Deed Homes in Decatur, Illinois
An Introduction to Contract for Deed
A Contract for Deed has many other names in Illinois; it can also be known as an Installment Land Contract, a Contract to Sell or a Land Sales Contract. In short, the seller of the home agrees to deed the home to the buyer on some date in the future (as long as the buyer has paid all sums due and all promises in the contract). The seller retains legal title to the property and the buyer retains possession of the property. The buyer lives in the property and the seller keeps the legal title and the promise to pay.
Most of these contracts require a down payment that is larger than a typical home purchase, then require the purchaser to make monthly payments until the purchase price is paid in full. The buyer will also be responsible for paying property taxes, homeowners association fees and insurance. In essence, the buyer is the owner of the property in every way except formal title.
There are a number of reasons why a seller might consider selling a home this way. For one primary reason, it gets the seller out from under the property and gives the seller what they want for the home immediately . The seller can cash in on their investment and then know they no longer own a property, which can be a serious relief for some people.
For the buyer, it gives them the chance to purchase a home that wouldn’t otherwise have been a smart move or possible on the traditional market. Buying a home through a home loan requires a substantial amount of loan and personal history. There are income requirements, credit checks and other standards that many people do not meet. A Contract for Deed does not have those requirements, essentially eliminating the need for a bank approval. Closing occurs quickly because an appraisal is not required. The seller may require an inspection, but the closing costs to the buyer can be significantly lower than with a traditional lender.
If you, as the buyer, miss just one of the payments, you could lose your entire property. Working with an attorney is the best way to ensure that one missed payment doesn’t result in the loss of the home. An experienced attorney can help you for as long as you live in the home, even representing you in court if necessary.
Pros of Contract for Deed in Decatur
One compelling benefit of the Contract for Deed arrangement is that your credit does not have to be perfect, while traditional mortgage lenders will likely not approve you because of a low credit score. In Illinois, conventional home loans have a minimum credit limit in the 620-640 range, while the Contract for Deed typically only requires around 520. The primary lender remains the seller in the arrangement who is open to working with you on affordable installments, and taking on the risk that you may default on the contract. The seller is relieved of accumulating the costs associated with maintaining the home during this time, and if you default, the seller can terminate the Contract for Deed after giving you time to catch up on the payments.
Another advantage of the Contract for Deed is that it is often much less time consuming than a traditional mortgage loan. You can close within a few days, whereas a conventional mortgage transaction may take several weeks to a month or two to complete. You will not likely need to enter into a contract for a lengthy period, as you will be able to close quickly.
Potential Downsides and Warnings
As with any type of real estate transaction, there are potential risks and considerations involved with contract for deed agreements. The most notable being the risk of default on behalf of the seller, leaving the buyer with little to no obligation to the seller except a return of the money already paid. While most sellers adhere to the payment schedule, others may not, leaving the buyer with a choice of remedies under Illinois law which generally include: if a down-payment was made, any would then go to the purchasers as damages; in the unlikely situation where the property is worth less than the unpaid balance of the purchase price, the purchasers may recover the amount paid less the rental value of the premises; and in the circumstance where the property is worth significantly more than the unpaid purchase price, the court would retain jurisdiction to determine the damages due to the purchasers and order the balance of the purchase price paid to be returned. This generally means that it is crucial for buyers in this circumstance to seek legal advice regarding their options.
Legal Obligations Under Illinois Law
Contract for deeds are legal in Illinois as long as they meet the requirements of Section 5-5.4 of the Illinois Criminal Code of 2012. Under this section, certain conditions must be met for these transactions:
• An amortization schedule must be prepared on a 30-year level basis or an equivalent schedule and be provided to the purchaser.
• The contract must be signed by the purchaser and the seller and must inform the purchaser that they have the right (but not the obligation) to consult an attorney.
• The seller must provide a copy of the notice of the purchaser’s right to cancel the contract and the notice of the purchaser’s failure to make a payment within 14 days of the date the payment was due or the day it was made, whichever is earlier.
• If the purchaser misses two or more consecutive payments, the seller must send them a notice informing them that their rights in the property will expire in 30 days if the overdue payments are not made.
If the purchaser fails to make payments and receives the required notification, then the purchaser’s only remedy for recovering their equity in the property is through equity litigation, which can be a very lengthy and challenging process.
How to Find A Decatur Contract for Deed Home
One of the many challenges of buying a home through a land contract is finding one that is currently available. A typical search for homes usually involves looking at multiple listings, then contacting each listing agent to see whether the home you are interested in is still available. This strategy can be difficult to apply in a contract for deed situation , where a search by listing agent may simply turn up a list of homes that are no longer available under contract for deed terms. Your best bet may well be to seek out some of the few real estate agents in the Decatur area that offer contract for deed listings. Ask the agents to obtain a list of all available homes from sellers willing to enter into a contract for deed. You should be able to find a full list of available contract for deed homes right from the source. If you have exhausted local agents and want to turn to an online source, there are a few webs sites that might be able to help. ZipRealty.com offers a helpful ISM procedure that lets you search for contract for deed listings specifically. Contract for deed real estate listings can also sometimes be found through Craigslist.
Case Studies and Examples
Consider a hypothetical family of four. Husband and wife have lived in Decatur for their entire lives. They are in their 30’s. They have good paying jobs. They have over 80% equity built up in their two bedroom apartment in the form of savings. This family would like to upgrade to a three bedroom home in a more child-friendly neighborhood in Decatur. However, they can’t afford to move into a three bedroom home without selling their apartment which is actually quite unusual in Decatur.
However, due to the 80% or more equity they have in their apartment, a savvy investor decides that they are the perfect candidate for a contract for deed. The investor agrees to sell the husband and wife, and their two young children, the three bedroom home, for a reasonable price of $200,000, with monthly payments of $1,200. Since this family has very little saved up due to their current financial situation, the investor agrees to waive the 3% down payment. The husband and wife agree to take on such a high interest rate of 6%.
Both the husband and wife are happy with the deal, as they can now save up money for their own future home. And they are also pleased that it appears that they have saved money on the property taxes of their new home. Due to the house being sold on a land contract, the investor still gets to claim all of the tax deductions for the property. Over the next several years, the husband and wife make all of their payments, while the investor receives a great return on a house he bought cheaply several years ago. While making payments on the home, the family occasionally has major issues with their home. However, being good tenants, they are rewarded by the investor making the majority of the repairs. The family saves up nearly $10,000 over 5 years before making the final payment to the investor. Therefore, at a combined purchase price of $230,000 ($200,000 for the home, plus $30,000 interest over 20 years), the family saves $30,000 in interest that would have typically gone to the bank in the form of a traditional mortgage.
Helpful Hints for Buyers and Sellers
For Buyers
Because a buyer does not receive a deed until the end of the term of the contract, there are additional protections that need to be considered before entering into the contract.
- Buyer should clearly understand the process if the buyer misses a payment. Will the buyer have an opportunity to cure the default? If so, what is the time period?
- Consider how the trust process will work. Verify that an independent person, such as trustee, will handle the funds. The owner should not be the trustee handling the contract payments from the buyer.
- Buyer should understand what happens if the owner sells the property during the term of the contract. Does the owner have the right to sell the property? What happens to the buyer and their investment if the owner sells the property? How will the buyer get the deed to the property if the property is sold?
- Buyer should require the owner to obtain a title insurance policy for the property. The title policy should be listed under a rider that provides coverage for a contract for deed . This will give the buyer confidence that the owner owns the property and there are no other issues that would cloud the buyer’s rights to the property once the final payment is made.
- In negotiating the final price for the sale, keep in mind the closing costs that will need to be paid at the end of the contract in order to transfer the title to the buyer. The buyer will need to pay these costs at the end of the term to receive the deed to the property. This cost could be significant and affect the final price paid.
For Sellers
1. If the seller will allow for a period of time for the buyer to cure a default in making the payments, then that period should be stated in the contract including the amount of time for the buyer to make the missed payment before the contract can be terminated.
2. In negotiating the final price for the sale, keep in mind the closing costs that will need to be paid at the end of the contract in order to transfer the title to the buyer. The buyer will need to pay these costs at the end of the term to receive the deed to the property. This cost could be significant and affect the final price paid.