AYU: Contracts for Deeds & Title Insurance (Sep 2023)

Contracts for Deeds and Title Insurance

Presented by Kay M. Creasman & Jon W. Brodegard

When a purchaser doesn’t have sufficient funds for a down payment, or perhaps doesn’t have a strong enough credit score to qualify for a reasonable loan secured by a deed of trust, a contract for deed may be an attractive form of alternative financing. In these situations, the purchaser takes possession of the real estate and makes monthly payments to the owner/seller of the property. Once the seller has been paid the full purchase price the purchaser obtains a deed from the seller. Their agreement, called a “contract for deed,” is normally recorded in the land records.

Problems from the purchaser’s viewpoint: The seller may have judgments attached to the real estate; if the seller has a deed of trust, the purchaser may lose the property if the seller’s deed of trust is foreclosed; the seller may die and no one can verify the amount that’s been paid over the years, especially if payments have been made at irregular intervals or been made as cash payments, etc. These problems may represent significant risk from the purchaser’s point of view.

Problems from the seller’s viewpoint: If the recorded documents aren’t properly drafted, the purchaser can vacate the property and the seller will need to locate them to release the contract that acts as a cloud on title; purchaser may not make payments timely or may make cash payments; purchaser may not pay for insurance or taxes as their agreement requires; etc. These problems may represent less risk for a seller, but a cloud of title of this nature is often difficult and/or expensive to eliminate.

How is title insurance involved? No title insurance can be issued until the deed is recorded that transfers title to the purchaser. Although we can insure a leasehold interest (if a lease or memorandum of lease were recorded), we cannot insure a contractual interest of this nature.

How are we seeing contracts for deeds today? Choctaw American Insurance Inc. and Trio mortgage loans are set up, effectively, to offer contract for deed financing as a commercial product. It is possible that other companies will follow their example. The scenario we have seen involves an original purchaser and a third party. The original purchaser usually does not have strong credit, but the third party (such as Choctaw American Insurance Inc.) has strong enough credit to finance the purchase. The original purchaser finds a home and enters into an assignable purchase contract. Then the purchaser assigns the contact to the third party. The third party purchases the property from the original seller, enters into a loan secured by the property, and also enters into an agreement to sell the property to the original purchaser at a stated price and at a stated time. This agreement between the third party and the original purchaser is usually structured as a contract for deed. The purchaser then can possess the real estate, establish better credit and, perhaps, save more for a down payment.

From a title insurance perspective, while we can’t insure the contract for deed, we can provide an owner’s title policy to the third party purchaser (if requested — normally the third party does not want an owner’s policy) and a lender’s policy for the loan made to the third party. We would not issue a policy in favor of the purchaser under the contract for deed. With these third party loans, special conditions must be met and forms signed.