What is a contract for deed?
A contract for a deed is a contract between a buyer and seller respected the sale of a single family home. The seller retains title to the property until the end of the contract for deed period. However, the seller is simply holding on to the title. With a contract for deed, the buyer has possession of the property and actually is living on the property. The buyer is also responsible for paying the property taxes and the closing costs. The buyer is only responsible for home repairs if that is what was set out in the contract. The buyer is responsible for paying the mortgage. With a contract for deed , the buyer is reimbursed for any expenses that he or she incurs including the closing costs incurred and other home repairs. With this type of deed, the buyer does not have to pay a down payment. The buyer is also able to afford a home because there is no mortgage. Even with a loan, a payment is required.
Many people pay more attention to a contract for deed because it involves someone’s home. It’s important for an individual to protect themselves under these types of agreements.
Illinois laws governing contracts for deed
Purchasing or selling a property through a land contract, also known as a contract for deed, can have substantial advantages and disadvantages. Familiarity with the legal implications is essential to an efficient transaction. While the basics of contract law are relatively straightforward, in Illinois there are specific rules that govern what can and cannot be done under a contract for deed. Illinois legislation has addressed the potential pitfalls of contracts and sets out rules that both buyers and sellers need to be mindful of.
One of the key laws that governs these contracts is the Illinois Credit Agreements Act. Under the law, an oral contract of sale for real property that is not followed by an enforceable written agreement is enforceable only for one year or less. The Illinois statute of frauds acts similarly and requires that every contract for sale of land be in writing. However, the statute does allow for the enforcement of contracts which have been partially executed, so long as part of the contract has been performed. In practice, this means that for contracts that have not been fully executed, a buyer may be able to recover any down payment or other performance if the buyer can show that he or she has invested time and money in the contract. There is a four-year statute of limitations on contracts and such lawsuits must be filed within that period.
While it is possible to enforce contracts successfully, neither buyer nor seller should enter into one without fully knowing both the risks and rewards.
Key elements of a contract for deed template
The following key components should be included in a contract for deed template in Illinois:
Parties and and Subject Matter: If a property is being purchased by more than one person, every person must be named in the contract as a purchaser. In the case where one of the purchasers holds only fee simple title for the benefit of another purchaser, that person should not be named in the contract as a purchaser, even though the person may be holding title in order to facilitate the sale.
Generally, the seller will be the current owner of the property. If there is more than one owner to the property or if for some reason the seller’s name is different from the title holder of the property, then specific language in the contract must refer to the parties by their names, such as seller John Doe in his capacity as trustee of the ABC Trust dated Jan 1, 1990.
Term of contract, Interest Rate and Payment Schedule: The term of the contract should be for no more than 30 years. It is also recommended to include a balloon payment so that the buyer will re-finance to a mortgage at the end of the term of the land contract. In certain instances, if the buyer has sufficient income, the terms of the contract may provide for monthly amortization payments of principal and interest, with a final balloon payment of the unpaid principal balance of the contract based on the remaining amortization schedule. In most instances however, the terms will provide that the interest rate will be fixed at a certain percentage. However, if the contract for deed is provided for more than five years, than the interest rate must be in accordance with the Federal Reserve Board interest rates ( 26 USC 1088); in other words, no more than 8% in interest may be charged . In addition, interest may not be charged on the last installment or on renewals or extensions of the contract.
Provision for taxes: Timely payment of real estate taxes is the responsibility of the purchaser. As the seller owns title to the legal interest in the property during the contract period, therefore the property taxes must be paid, although they will be reimbursed to the seller in his capacity as trustee. If the taxes are not reimbursed, this is a ground for foreclosure.
Provision for insurance: The buyer will be required to place insurance on the owner’s risk of loss. In the event of loss, the insurance proceeds will be used to pay off the balance of the trust note to buy back the interest of the seller.
Protection of Parties Interests: If the seller defaults in his obligation under the agreement, the entire balance of the purchase price is due. However, if the purchaser defaults in his obligation, the seller is only required to give a notice to the purchaser of his right to cure prior to acceleration of the remaining unpaid balances. The seller must give a sixty (60) day notice to the purchaser prior to acceleration and cancellation of the contract.
Benefits and drawbacks
Contract for deed templates in Illinois have benefits as well as disadvantages. One of the advantages is that they are often times the only option available to some buyers. They can be particularly useful for those who are unable to obtain financing from a bank. Real estate agents will sometimes utilize contract for deed to make deals happen when traditional financing is not a viable options.
But the requirements can be an issue. Buyers cannot obtain a mortgage when the property is land trust property. Owners of land trust properties do not have the ability to give a traditional warranty deed or deed otherwise transferring title to the property. The owners of the land trust cannot transfer legal title to the property to the buyer. In other words, the seller has no power to transfer legal title to the property to the buyer until the sale is completed. Because the foreclosure by the buyer is judicial, buyers may be subject to a lengthy court process before the court can allow the foreclosure.
Steps for creating a template for a contract for deed
With your purchase of your Illinois Contract for Deed template comes detailed instructions on how to edit the document to reflect your specific deal. In addition to the instructions, it is a good idea to take time to review the entire document to make sure it reflects what you intend to do. If you are editing the document, make sure to go over each section or paragraph to ensure that your edits made sense in the context of the entire contract.
- Review how the parties to the contract are listed in the introductory paragraph. Your purchase contract or earnest money contract should reflect a way to properly identify the buyer as it would be identified on the contract for deed. In addition, make sure that the contract does not use the original purchase contract to define the buyer.
- Verify that your legal description is properly listed . This will require that you have a current title policy or at a minimum, a current ILTA Survey. If you have neither you can obtain this information from your title company or attorney.
- Verify that all sales prices and down payments are properly listed. Make sure you account for the deposit made by the buyer under the earnest money contract. The earnest money received under the purchase contract should increase the contract for the sale price as the buyer is getting credit for the deposit previously made.
- Make sure that any additional terms or requirements previously negotiated are reflected in your contract for deed. Keep in mind that the contract for deed is a legally binding agreement. Out of necessity, a lot of time and effort is put into preparing the appropriate contracts.
Common pitfalls and how to avoid them
Like all contracts, a contract for deed may succumb to errors. Here are some of the more typical errors we see in practice:
- Lack of recording attempts. While contract for deeds are not eligible for recording at the Recorder’s office because they are not deeds, however, the Illinois Mortgage Foreclosure Law requires that the contract for deed be recorded to make it valid against a spouse (who did not sign the same contract for deed).
- Lack of consideration, or at least what looks like consideration. The contract for deed must recite that the buyer paid at least $1 for the property. Otherwise, the contract for deed could be considered a gift, which is a BAD IDEA as described below.
- Divorce, bankruptcy or some other life event. Either the buyer or seller has gone through divorce or some other event in the previous 10 years that needs to be disclosed (such as a bankruptcy or judgment against them).
- Derogatory items. Either the buyer, seller or their spouse have derogatory items on their credit report which do not appear to have been resolved.
- Unclear terms. The contract is missing the interest rate, which can not exceed 5% per annum based on Illinois law.
Most of these errors can be avoided by having an attorney experienced in preparing and/or reviewing contracts for deed.
When to contact a lawyer
In certain situations, it is not enough to rely on templates and gathering information online. Whether you are a buyer, seller, or investor, you may want to consider engaging a legal professional when dealing with a contract for deed. My recommendation is to contact an attorney as soon as possible. The sooner the better.
Buyers
After the Contract for Deed is delivered, the buyer has the right to obtain an independent appraisal of the property at his or her own expense. Buyers also have the right to request that the seller not convey the property to anyone else until the buyer has the opportunity to determine if he or she wants to proceed with the contract. An attorney can negotiate a reasonable amount of time for buyers to decide. Since the contract will have a risk of equity forfeiture in the event of default, a buyer needs to assess the contract and the property carefully.
Sellers
If the buyer purchases other residential real estate during the one-year period of the interest-only payments, the buyer may no longer exercise the interest rate reduction clause stated in the contract. If the buyer will be purchasing other residential real estate in the near future, the seller may be able to negotiate an alternative interest rate reduction strategy. An attorney can assist the buyer and seller in assessing the best strategy to meet their individual needs.
Investors
Real estate investors may consider the interest rate reduction clause in order to target earnest money deposits at down payments. In this scenario, the buyer may offer a higher down payment in exchange for a lower interest rate. In exchange for a higher down payment, the investor can keep the home for a longer period of time. If the investor is shopping the property to flip it again, then the original contract for deed may be a helpful tool that can be assigned to the next person. Having an attorney write the contract can help to confirm that the original buyer is not legally obligated to return to the seller. The second buyer could then foreclose on the subject due to the failure of the defaulting buyer to return. Drafting a custom-built contract for deed to address all of these parties can save time and trouble later.
Resources for templates and additional information
For those looking for contract for deed templates in Illinois, there are several reliable resources available. The Illinois State Bar Association provides a wealth of information on real estate law, including detailed guides and articles about Illinois-specific contract law. Their website includes access to the "ISBA Professional Conduct Advisory Opinion", which can provide insight into legal standards and consider certain issues that may arise during the execution of a contract for deed.
Another valuable resource can be found on the DuPage County Bar Association website, which features a real estate section with comprehensive information about contracts for deed and other real estate related topics. The DuPage County Bar Association RealeState.org offers access to real estate attorneys who can provide information on the contract sale process . The site also features links to information about real estate events and seminars.
A more traditional physical source of templates and resources for contracts for deed can found at local libraries. Many public libraries have extensive real estate law sections which include contracts for deeds. Professional bookstores such as Barnes and Noble, Follett’s and Half Price Books often carry books on real estate law that offer explanations for Illinois-specific contract for deed forms and blank contract for deed templates.
In addition to these sites, they are also numerous articles, web pages, and forums available on the web dedicated to contract for deed sales in Illinois, though most of them will not be tailored to Illinois’ specific laws and regulations. It always pays to research contract law in Illinois to ensure that you avoid common pitfalls in the state.