For some buyers and sellers, conventional transactions just don’t work. For these types of situations, a Real Estate Installment Contract (also known as a “Contract for Deed” or a “Rent to Own Contract”) may be a better option.
What is an Real Estate Installment Contract?
A Real Estate Installment Contract (REIC) is a written agreement between a buyer and seller for a buyer to purchase a property. It sets out a purchase price, the length of time the buyer has in order to pay off the purchase in full, payment terms including the interest percentage, and any rules the buyer has to follow. REIC are different to regular financing in which the seller acts as the lender and carries the financing. Once the contract is paid off, the buyer receives a deed to the property and the property becomes fully theirs.
Buyer: Pros and Cons
People who do REIC with sellers are typically not your traditional buyers. They may need some creative financing, sometimes they know the seller, or maybe they need to be in the property sooner than conventional financing would allow. Not all contracts are created equal though. Here are five possible pros and cons of purchasing a property via REIC:
- REIC can be a viable option for buyers with limited access to traditional financing or who may have a poor credit history, allowing them to purchase a property they otherwise wouldn’t be able to afford.
- REIC often offer more flexible terms and conditions compared to traditional mortgages, allowing buyers to negotiate payment schedules, interest rates, and other terms directly with the seller.
- Faster acquisition
- The process of purchasing a property through a REIC can be quicker than going through a traditional mortgage, as it eliminates the need for a bank’s approval and auditing process.
- Potential for negotiation
- Buyers have the opportunity to negotiate the purchase price, interest rate and other terms directly with the seller, which can result in potentially lower costs and payments.
- Investment potential
- Buyers may have the opportunity to benefit from any appreciation in the property’s value during the contract period, allowing them to build equity over time.
- Higher interest rates
- Sellers may charge higher interest rates compared to traditional lenders due to the added risk associated with REIC, which can result in increased overall costs for the buyer.
- Lack of ownership rights
- While buyers have equitable interest in the property, the seller retains legal ownership until the REIC is fully paid, limiting the buyer’s rights and control over the property until the transaction is complete. Things like renovations, painting walls, etc. might not happen until the contract is paid in full.
- Risk of default
- If the buyer fails to make payments as agreed, the seller may have the right to terminate the REIC and retain all payments made, leaving the buyer without the property and any payments and investments that they have already put down on the property.
- Limited financing options
- Buyers relying solely on installment contracts may face challenges in refinancing or obtaining additional financing during the contract period, limiting their financial flexibility.
- Potential for seller disputes
- Since the seller acts as the lender in an installment contract, there is a possibility of disputes or conflicts arising during the contract term, such as disagreements over repairs, property conditions, or payment issues, which can lead to legal complications.
- Higher interest rates
It’s important for buyers considering a REIC to thoroughly understand the terms, consult with legal and financial professionals, and assess their own financial situation before entering into REIC.
Seller: Pros and Cons
There are many reasons why some sellers prefer to sell their property as a REIC as well.
- More potential Buyers
- By offering seller financing through a REIC, you open up your property to a larger pool of potential buyers who may not qualify for traditional financing, thereby increasing the chances of a successful sale.
- Higher sales price
- With seller financing, you have the opportunity to negotiate a higher purchase price for your property, as buyers may be willing to pay a premium for the convenience and flexibility of installment payments.
- Steady income stream
- The REIC allows you to receive regular payments from the buyer, creating a steady income stream over the duration of the contract, which can be particularly advantageous if you don’t need the full proceeds from the sale upfront.
- Interest income
- As the seller-lender, you can charge interest on the installment payments, potentially generating additional income and improving the overall return on your investment.
- Potential for property retention
- In some cases, a REIC may include a provision that allows you to retain legal ownership of the property until the contract is fully paid, giving you added security and control over the asset.
- More potential Buyers
- Increased risk
- A seller assumes a higher level of risk compared to a traditional sale, as the buyer’s ability to make regular payments and fulfill their financial obligations becomes a critical factor in the success of the transaction.
- Potential for default
- If the buyer defaults on the installment payments, you may face challenges in reclaiming the property and may need to go through legal proceedings to regain possession, which can be time-consuming and costly.
- Limited liquidity
- By entering into an REIC, you tie up a significant portion of your capital in the property, limiting your access to immediate funds that could be used for other investments or personal needs.
- Market risks
- During the REIC period, you are exposed to potential market fluctuations and changes in property value, which could impact the overall return on your investment.
- Administrative responsibilities
- As the seller-lender, you may be responsible for managing various administrative tasks, such as collecting payments, tracking insurance coverage, and ensuring property taxes are paid, which can require additional time and effort.
- Increased risk
It’s important for sellers considering a real estate installment contract to thoroughly evaluate the financial stability of potential buyers, seek professional advice, and carefully structure the contract terms to mitigate risks and ensure a successful transaction.
Is a REIC Right for Me?
You must weigh all of the pros and cons of a REIC before entering into one no matter either side of the transaction you might be on. Contacting a trusted real estate professional or attorney is the first key to success in completing a REIC. Taking matters into your own hands or printing off a REIC online could bring potential risk to you and your property, so making sure that a the contract is well written and recorded can save you time, effort and money in the long run!