If a seller is not careful in how the Contract for Deed is constructed, there are laws that protect the buyers and punish the sellers. A Seller should be cautious in the following areas:
1) Down Payment: The requirement of a large down payment can be considered equity-stripping, especially if the Buyer takes on further debt.
2) Interest Rate: Charging interest rates greater than 10% triggers predatory lending flags. Sellers could face dire consequences.
3) Payment Amount: If the monthly payment requirements soar so high that the Buyer could never have afforded them, a court will view the contract as if it were set up to fail by the Seller. Request the Buyer’s consent to pull their credit report and verify their income. This will help gage a reasonable monthly allotment.
4) Cancellation: If the Buyer falls behind on the bills, the Seller may take action to protect himself. However, it requires specific paperwork be served to the Buyer, and they get 60 days to catch up on payments. A Buyer may be evicted only after 60 days. Failure to follow the proper procedure for cancellation will prevent the Seller from evicting the Buyer for long periods of time.
Problems for a Seller pop up after a Buyer defaults on a term and the Seller moves to evict. Only then will the Seller find out about the equity stripping down payment, unfair interest rate, or the destined-to-fail Contract for Deed because the Buyer could never afford the payments in the first place. A Seller may make money under a Contract for Deed, but they should hire an attorney to draft the document and offer an opinion as to the reasonableness of the terms.