Reasons for size of down payment contract for deed

(My Original Blog Post: http://timemyself.com/time/financial/invest/real-estate/contract-for-deed/reasons-size-payment-contract-deed/)
What size is the house: Generally speaking the larger the house, the more of a down payment the buyer will need.  If it's a 1100 sq ft house, that's an older house in St. Paul, 5% down payment will probably work.  If you are looking for a $500,000 house that's in Edina in excellent shape, those seller's are less picky and will wait a month or two to find the right buyer in most cases. They may want 15-20% down payment.   The better the condition, better location, and less motivated the seller is, the better the chance they will demand a larger down payment.

What is the seller's comfort level: The seller's comfort level has a lot to do with how much of a down payment they want.  If the seller is worth $500,000 net worth, and has an extremely nice home, they probably are less comfortable with a contract for deed, and not at all desperate to let someone live there or own the house on a contract for deed for such a small amount of money.  The reason is that the seller knows the time and money it takes in the worst-case scenario to kick the contract for deed buyer out of the house, cancel the transaction, and clean up the house from the damage left behind.  A seller behind in payments or that has a house that needs repairs in a bad neighborhood is more likely to let you buy on a contract for deed from them for a low down payment, but as a buyer that may not be smart for you to buy, due to the circumstances.

How is the buyer's credit: With some seller's the buyer's credit matters a lot.  As a seller myself that would consider selling a house on a contract for deed to someone, here are some concerns I personally would have with the buyer I choose:  The reason I explain this to you is for you to be very upfront as the buyer and explain it to whomever you do a transaction with.  As a seller I would be a little concerned with a buyer with bad credit, but my biggest concern is a background check for a criminal background.  I would be concerned about recent bankruptcies, pending, discharged, etc. I am also concerned with recent short sales or foreclosures on the buyer's record.  That doesn't mean I won't sell to them, it's just something I need to know up front, here is why:  Some lending guidelines these days are asking for up to 2 years before someone can get financing after a recent bankruptcy.  That would be something both the buyer and seller need to keep in mind.  At the time of this post I have information stating that FHA will allow financing to someone only 3 years after a foreclosure, whereas Fannie Mae is getting stricter with a 5-7 year wait after a foreclosure.  This is something the buyer and seller should both be well aware of going into a long term purchase contract.  Also a recent short sale of the c/d buyer's previous house sale may need you to allow up to  2 year wait of a future finance purchase.  These are all things to plan for and discuss ahead of time with both buyer and seller.  Also if the buyer's credit score is very bad, like in the 400's, then it could take many years and strong financial discipline to get up to a credit score that would ever allow for financing.   I will tell you as a seller myself, that someone with bad credit, that has a large enough down payment would make me feel better about accepting them as a buyer, so as a buyer, try to have a large down payment, this is very important today.

How do the terms look: Terms are negotiable with the buyer and the seller in most cases.  What I mean by terms is the interest rate paid, which determines your monthly payment.  Also it will be decided if it will be an interest only payment, or a amortizing payment. In addition,  we need to keep in mind the balloon date and term.  The balloon date is simply the date the full amount of the loan must be paid off by.  What this means to you as the buyer is that you may make your contract for deed a standard 2 or 3 year balloon term.  This means you make your down payment at the time of the closing with the title company.  The remaining balance of the purchase price minus the down payment is due by the end term of that balloon.  That's the deadline, you could always renegotiate with the seller if they are willing to.  2-3 years in most cases is plenty of time to get financing lined up and get your credit score fixed or much higher.  One other part of the term may be how much of a down payment you are putting down.  Their are minimal closing costs involved with a contract for deed, such as title closing fees, pro-rated taxes, city assesments, etc.  Fees are pretty negotiable, so you will want to work a win-win on these terms with the seller.   Also as a buyer you would record the contract for deed, showing you have ownership in the country records. At the time of this writing you are required to record the contract for deed within 4 months. There are reasons why people don't want to record, but let's discuss doing what is suppose to be done, show on record as the new owner, and later you can try to refinance the property and also create a cloud on the title, and with that cloud on title, the seller can't easily go pull more cash out of the property or create more new liens on the property.

Where are the contract for deeds being found: Many contract for deeds can be found on the MLS (Multiple Listing Service) I personally think that contract for deeds are created and negotiated and not easily found through advertising. What I mean by that is a lot of it is behind the scenes with sellers.   Let me explain:  I know many landlord and seller's in the real estate business.  Of them, most of the landlords are fully aware that they can rent out their property or simply sell their property to a finance buyer.  Sometimes it takes me as an agent or investor, to come to them and ask if they would be willing to sell the house on a contract for deed for the right buyer with a solid down payment. In this scenario I may have to explain to them what a contract for deed is.  In many cases this makes sense to the seller, if the seller is willing to hold the property for awhile, is current on payments, and their payments are fixed for awhile with a locked interest rate.  Finding the properties and seller's is usually not a problem for me if the buyer is a little flexible on the kind of property, I just find these days that I need more buyers with a larger down payment to make it make sense for everyone involved in the transaction, so everyone gets paid including the buyer's agent, listing agent, and seller.

Where are the CD's located and what is the condition of the house: As a general rule houses available on a contract for deed for ownership and larger down payment are probably going to be in better shape and located in better suburbs and cities, or at least more to choose from. The houses are likely not going to have deferred maintenance like some rental properties do.  The more money you put down, the more of a selection you'll have as a buyer.

What are the seller's reasons for selling: The question of why a seller would ever sell on a contract for deed would have many answers.  Many sellers would like someone to take care of the property and take ownership of the property vs. just renting out the property. It's less of a headache and less time involvement for a seller to just sell the property.  Also a substantial down payment to the seller will ease the seller's fears about damage and how serious the buyer is.   Also the seller thinks the chances of the buyer following through with a purchase increases in scenarios with a substantial down payment.  The seller would want to be more hands off on the property.  The buyer is going to make the repairs and take full ownership for the property, pay property taxes, insurance, and basically everything.  The seller may just not have time for the property anymore with the managing of it.  Also some seller's, depending on their age and financial situations may find that selling on a contract for deed is better for them in relation to their taxes then compared to getting one lump sum from a buyer with financing who cashes them out.