A Contract for Deed: Who else may have an interest in the property?
A contract for deed agreement is nothing new. These agreements are between a current owner of the property (the “legal titleholder”) and a person who is interested in purchasing the property from the owner (the “equitable interest holder”) but may not be eligible for traditional financing (or for other reasons), and the owner agrees to finance the transaction. The equitable interest holder typically takes possession of the property in exchange for making monthly or other periodic installment payments, along with possible other obligations, to the legal titleholder. If all the terms in the agreement are successfully satisfied, the legal titleholder is expected to transfer the title by deed.
Contract for deed agreements are frequently not recorded in the county land records. However, as an example, Texas requires executory contracts be recorded by the seller within thirty (30) days from the date of execution or the seller may be liable for damages to the other party for noncompliance. In Texas, such a recorded executory contract is treated as a deed with a vendor’s lien. See Tex. Prop. Code § 5.076 and 5.079. Other states also have statutes addressing executory contracts.
Contract for deed agreements have been the subject of many lawsuits. Generally, a lawsuit can be the first opportunity for a non-party to know that an unrecorded contract for deed agreement exists. A claimant is either sued or discovers the conflict through other communication, typically from the equitable interest holder. The claimant, at times, files a notice under its title insurance policy seeking coverage for such disputes. As each case is different and depending on the specific title policy, a coverage determination will be unique to the situation. Therefore, it is important to be aware that contract for deed agreements exist and that they may impact a new buyer’s title or a lienholder’s interest in the property.
The claims team has encountered situations involving contract for deeds. For example, a lender may be preparing a foreclosure action involving a recorded mortgage or deed of trust when it discovers a lawsuit naming the lender’s borrower. The plaintiff alleges it entered into a contract for deed agreement with the prior owner several years earlier. The plaintiff states the prior owner failed to execute the deed to the plaintiff at the completion of the terms of the agreement and now seeks a recordable deed to the property, free and clear of the lender’s lien. The plaintiff also argues it timely satisfied all obligations under the contract for deed agreement before the seller sold the property to another and the lender’s lien attached to the property; and thus, alleges that the subsequent transaction is clouding the plaintiff’s title and is void. There may be various legal and equitable defenses for the lender in such a lawsuit, but the time and expense incurred may be significant.
Practical Pointers
Before closing on a home, there may be ways to uncover and address a contract for deed agreement before the issue culminates into contentious litigation for new buyers and lenders. Here are some steps to consider:
- If the seller asserts there is a tenant occupying the property, ask if there is or has been any contract for deed agreements (a/k/a installment purchase/sale land contract) with the tenant or any other party.
- If there is a contract for deed and the intended purchaser has defaulted or violated the agreement, request written documentation identifying that the contract for deed agreement is cancelled. In certain cases, this may require legal action by the seller to establish that the equitable interest is extinguished. It is recommended that this documentation be recorded.
- If the terms of a contract for deed are still in effect, however, the seller and the intended purchaser mutually agree to terminate the contract, it is recommended that a written termination of the contract for deed agreement between the parties be obtained and recorded.
- Last, if the intended purchaser under the contract for deed is unwilling to release their equitable interest or asserts that the legal titleholder has violated the agreement, then contact the anticipated title underwriter and the proposed lender prior to the closing date to discuss what options may be available for the situation.
A contract for deed remains a resource to help some with the home buying process. However, the impact of such an agreement can later result in a challenge to the title and impact others when a dispute arises between the parties in the agreement. If you have questions, reach out to me or any member of the Alliant National claims team.
Resources:
Myslajek, C. (January 1, 2009). Risks and realities of the contract for deed. https://www.minneapolisfed.org/article/2009/risks-and-realities-of-the-contract-for-deed.
Texas Property Code, Title 2 – Conveyances, Chapter 5 – Conveyances, Subchapter D. Executory Contract for Conveyance. https://statutes.capitol.texas.gov/Docs/PR/htm/PR.5.htm
The Office of Minnesota Attorney General. Contract for Deed. https://www.ag.state.mn.us/Consumer/Publications/ContractForDeed.asp
Vockrodt, S. and Ziegler, L. (March 2, 2022). Contract for deed: The promise of homeownership that often leaves Midwest buyers out in the cold. https://www.kcur.org/news/2022-03-02/contract-for-deed-the-promise-of-homeownership-that-often-leaves-midwest-buyers-out-in-the-cold
This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.
Tags: claims avoidance, property deed, real estate