Alternative Home Financing Can Be a Path to Home Ownership

About 7 million U.S. homebuyers currently use alternative home financing—in which buyers make payments directly to sellers using instruments such as land contracts, seller-financed mortgages, lease-purchase agreements, and personal property loans. Although these arrangements may work for some homebuyers, they’re typically riskier and costlier than mortgages. In some instances, sellers do not give buyers the deed or title to the home until the final payment is made. This means that buyers can be treated like renters instead of homeowners and may have difficulty demonstrating legal ownership of the property. Additionally, these arrangements can muddy important issues such as whether the buyer or seller is responsible for home maintenance and repairs.

This 2nd in a series of interviews with alternative financing borrowers is with Joseph, who lives in a duplex in Minneapolis and financed his home purchase with a land contract (also known as a contract for deed). He has asked that his last name not be used.

The interview has been edited for length and clarity.

Q: How did you enter into a contract for deed arrangement?

A: I was flipping houses and made quite a bit of money: I had a 7,000-square-foot house and a lot of properties. Then the market crashed in 2008; a lot of my properties went into foreclosure, and I owed a lot of money, so my credit was shot. I needed a place to live. I was probably not going to make it through a regular mortgage process, and so I ended up buying this home on contract for deed.

Q: Was that your idea or the seller’s?

A: Mine. It was the only option I had other than paying for the whole house at once, which I wouldn’t have done anyway because there are still liens on the property and an encumbered title with the probate. I had enough for a down payment and was able to get the home for a good price.

Q: How good a price?

A: It was $50,000, with a 4.5% or 5% interest rate. I put down about $15,000.

Q: How does the financing arrangement work?

A: It’s an interest-only payment schedule, a little over $200 each month. Obviously, I had to have home insurance and pay the property taxes, which is in the contract.

Q: And you pay that directly to the seller?

A: Yes.

Q: Did you have any reservations when you started talking to the seller?

A: No, because I’ve been through a lot of situations where I purchased challenging properties. This home was in a rough spot; I was in a rough spot. It was a good marriage.

Q: When you say the house was in a rough spot, what do you mean?

A: It needed a lot of work, like a total rehab. There was no running water or electricity in half of the house, and it had code violations—issues that would disqualify the property for a conventional mortgage. That eliminates a whole bunch of financing options. The house was pretty much destroyed, and the seller knew he would have a hard time finding somebody else to buy it.

Q: And there were legal hurdles too, correct?

A: Yes, and some of them still haven’t been resolved. The original seller was in the hospital at the time and his brother had power of attorney, so I signed the contract with the brother. They wanted somebody like me to take over the legal issues with the county and the city because it was an absolute nightmare for them.

Q: Then what happened?

A: Both the original seller and his brother passed away. Now I’m working with the other brother, and I have one last payment to make but I still don’t have a clear warranty deed, and I can’t pay the rest of the contract until they give me that. I thought the heirs would have the situation taken care of, but now it looks like I’ll probably have to pay for my own attorney to get it done. This has gone on forever because of the unsolved problems with the property.

Q: Despite all that, would you use a contract for deed again?

A: Yes, I’d do it again if it had favorable rates compared to a mortgage company. Sometimes you can get a better rate, better terms, maybe a lower down payment if you do a contract for deed. And if you’ve got more of a down payment, you get an even better interest rate. 

Q: But isn’t it riskier than a conventional mortgage through a bank?

A: There’s some risk. If you know there are issues with the house and you don’t have some legal experience, you may want to stay away from contract for deed. It could be a situation where you could lose your whole property.

But you’re always taking chances when you invest in anything these days. And you don’t have personal relationships with anybody at a bank; you work with a different person every time. You may know a mortgage broker, but usually the broker is not there year after year as you make payments.

On the other hand, if you have a contract for deed, you probably know the person who’s financing it because it’s their property. You know the person’s name; you know where they live. You may have been to their house and had dinner with their family. It’s more of an intimate contract rather than something coming off of a robot printer.

In a contract for deed, the seller’s name is still on the property until you make the final payment. So they need to be aware of things.

Q: Could there be a downside to not dealing with a large institution?

A: Well, as in my case of working with one or two people rather than a bank with 50,000 people: Someone dies, and it changes your whole relationship and claim to the property.