The Pros And Cons of Buying A Duplex On A Contract For Deed

Let’s face it. Many of us would love to buy a duplex.

That is, if we could get a loan for one.

Tightened lending standards, however, mean a lot of us can’t qualify for a bank loan.

And that’s why we’ve begun to see the re-emergence of the contract-for-deed.

A contract for deed or CD, which is also known as a land contract, carrying a note, or owner financing, is a duplex sale where the present duplex owner acts like the bank for the buyer.

While I wrote about this a while back, it certainly is worth revisiting.

So what are the advantages of buying a duplex using seller financing?

1. There are no loan origination fees.
2. The sale can close quickly.
3. There are no limits to the number of duplexes you can buy this way.
4. Owner financing doesn’t show up on your credit report.
5. The seller may be willing to accept an offer from a buyer with less than perfect credit.
6. The seller may accept a higher down payment.

Of course, there are disadvantages to buying using owner financing as well, including:

1. Contract for deeds typically have higher interest rates than bank loans. This makes sense, especially if the duplex seller has a loan that’s at an interest rate higher than what’s currently available through traditional lenders.
2. A shorter foreclosure period. The seller may begin foreclosure if you miss two payments. Foreclosure is almost immediate. There aren’t months of waiting for sheriff’s sales and redemption periods to end.
3. The seller may require a higher down payment. Seller’s usually need a fixed amount of cash in order to move on to their next home or project.
4. The contract for deed may trigger a due on sale clause. For further explanation, click here.
5. Buyers may face a balloon payment at a time when the financing available from traditional lenders has less favorable terms.
6. Fewer duplexes to choose from.  The vast majority of duplex sellers simply want to be done with their property, and aren’t willing to offer owner financing. This gives duplex buyers fewer properties to choose from.

As always, it is critical that you do the math before you buy so you are certain you can cover mortgage payments in the event of a vacancy or any other loss of revenue.

It  is also wise to consult with either a Realtor or real estate attorney familiar with the process of buying a duplex on a contract for deed in order to make sure both you and the seller are legally protected.