Sellers providing owner financing might elect to use a Real Estate Contract, Contract for Deed, or Land Contract to document the transaction rather than a Note and Mortgage or Note and Deed of Trust. There are both advantages and disadvantages to carefully consider when choosing a Contract.
The big difference with a Real Estate Contract is that the buyer will not receive the Deed to the property until the full amount the seller financed is paid in full. The seller remains the title holder while the buyer is making payments. A contract is like a layaway program for the Deed.
This differs from a Deed of Trust or Mortgage where the seller provides a Deed to the buyer at closing, transferring title to the buyer. The buyer simultaneously gives back a Purchase Money Mortgage (or Deed of Trust in some states) to the seller for the portion financed. When the amount financed is paid in full the Lien is simply satisfied.
When the seller holds fee simple title using a Real Estate Contract the buyer is holding equitable title. Since the buyer does not hold title through a Deed it is almost impossible for the buyer to obtain any type of secondary financing unless the Contract is paid off.
The buyer also risks the seller encumbering or clouding title before the Contract is paid and the Deed released. For this reason, it is often advisable to have the Fulfillment Warranty Deed held in trust by a third party escrow servicing agent.
If the buyer quits paying and the seller needs to take back the property, a Real Estate Contract often has the advantage of being faster and less expensive than a drawn out foreclosure process on a Mortgage or Deed of Trust.
The accepted use of a Real Estate Contract varies by state. They are fairly common in Western states like Washington, Oregon, Idaho, and New Mexico along with some Mid-Western states such as Michigan. However a few states, like Texas, have passed regulation prohibiting these types of Contracts.
A Real Estate Contract can be unrecorded or recorded at the county level depending on local practices. A seller can sell contract payments for cash now. However, some investors may require conversion to a note and mortgage or a note and deed of trust.
A knowledgeable title company or real estate attorney can assist in selecting the best method of documenting the seller financed transaction.