Contract for deed or deed now with a recorded lien when acting as the bank on rural acreage

I voted deed at closing, and the reason is entirely about the exit. Every time I've asked someone who buys installment paper what they'd rather see, the answer has been a note and a recorded lien. Contract for deed paper gets bought too, at a wider discount, and sometimes with a request that you convert it first. If you never plan to sell a note that doesn't matter. I don't know yet whether I'd want to sell, so I'd rather not build a portfolio I have to rebuild.

Basic mechanics question since I'm on the outside of this. In the contract for deed version, does anything get recorded at closing, or is the whole arrangement invisible in the county records until payoff? I ask because if nothing is recorded, I don't understand what stops the seller from encumbering the parcel while the buyer is paying.

@derekj19 in many states the contract or a memorandum of it can be recorded, and in some it has to be. That's exactly the kind of item that differs state to state, along with whether the buyer gets a statutory cure period and whether a forfeiture is available at all after a certain amount has been paid. I've read three operator write-ups that contradicted each other and all three were probably right about their own state.

@tylerbrooks9 the framing I'd add is that you're not really choosing between two documents. You're choosing which state's process you want to be standing in on the bad day, and that means the answer starts with a local real estate attorney reading your form. I'd pay for that once and reuse it fifty times.

Watching how private money prices this kind of paper, the discount on land contract paper is real but smaller than people often claim, especially when the payment history is long and the down payment wasn't token.

Consider a run of sixteen terms sales over a few years, twelve on contract, four with a deed and deed of trust, as a case worth studying. The contract sales that default early tend to be genuinely cheap to unwind. Say two buyers stop paying in months four and six, the seller sends the notices an attorney drafted, they do not cure, both sign a release rather than fight, and the parcels get resold within ninety days at a higher price because they show better with a mowed trail by then. Total legal cost under $1,200 for both. The painful case is a buyer four years into a 96 month contract who has paid about 42 percent of the balance and then stops. Forfeiting that position often feels indefensible, and in many states it likely would not hold, so the practical outcome is a payoff discount to let the buyer walk away clean, at a cost of roughly $6,000 in expected interest. A sensible split coming out of that pattern is contract for deed under about $25,000, deed and lien above it. That threshold tends to get set by losing money on one deal, not by reasoning it out in advance.

@carlos_nunez the number that should make anyone nervous is how much equity a buyer has in before things go wrong. The disclosure question matters too. A seller carrying financing should decide up front what happens at 40 percent paid versus 10 percent paid, and put it in writing, rather than leaving that conversation for the moment things go sideways.

One thing I'd flag from the licensing side of my reading: doing a handful of seller-financed sales a year is treated differently in different states, and repeatedly originating consumer-purpose financing can pull you into rules you didn't plan for. Raw recreational land often sits outside the consumer mortgage rules, and often isn't the same as always. If your buyer is putting a cabin on it and living there, ask an attorney where the line is in that state before you write the tenth contract. Not the first one, the tenth, because volume is usually what trips the trigger.

Nobody has said anything about the tax bill yet, which is where the most avoidable damage tends to happen. Under a contract for deed, the seller is still the owner of record in most counties, so the treasurer sends the bill there. If the contract makes the buyer responsible for taxes and the seller doesn't collect them monthly, it's common to discover in year two that three years of bills went unpaid and a tax certificate got sold on a parcel still held in title. Contracts that leave buyer-paid taxes with no verification step written in are more common than they should be. Under a deed and mortgage the bill goes to the buyer, which sounds cleaner, except a delinquency can produce a tax lien ahead of the mortgage and it goes unnoticed without a monitoring service or a manual check of the treasurer's site once a year. Either structure works. Neither works without a written mechanism for confirming taxes got paid.

@wendy_park48 that's the first thing in this thread that fits in a model. Which raises the real question: how do people model default recovery at all? Building a terms sale underwrite usually means guessing at a default rate and a recovery period, and those guesses are rarely grounded in anything harder than instinct.

@luis_carrera stop modeling a default rate and model a default outcome, because on a resale the recovery is often positive. Take a parcel underwritten at $12,000 cost, sold at $32,000 with $3,000 down, 96 months, 10%. Payment lands near $440. If the buyer quits at month 8, the seller has collected $3,000 down plus about $3,520, minus maybe $900 of unwind cost and two years of taxes at $200. Call it $5,220 net against a parcel still controlled by the seller. Resell at $32,000 again and the first buyer improved the return. The scenario that actually hurts is @carlos_nunez's, a buyer deep in with equity, because there the choices are a discounted payoff or a fight, and both cost real money. So the number worth tracking is not default frequency. It is the distribution of when defaults happen. Early defaults tend to be the more forgiving case, though any single operator's sample is usually too small to call it a pattern.

@dpatel_re that example assumes a resale at the same $32,000 and a parcel that comes back in the shape it left. Parcels can come back with a half-finished pad, a dead well casing, and someone's abandoned camper on it, with cleanup running $4,100 or more. A $900 unwind cost is doing a lot of work in that math. Run the numbers with a 30% chance of a $4,000 cleanup and a 15% haircut on the resale, and an early default stops looking like a gift and starts looking like a wash.

This is the first thread where the document choice finally made sense to me. What I still don't get is the buyer's side. Does a buyer on a contract for deed know they don't hold the deed? Or does it come as a surprise later?

@jordan_ellis2 they know, because it's in the document in plain language, and some of them don't care at all. That's the part people miss. A buyer paying $3,000 down for 20 acres to hunt on is not thinking about title theory.

Where it bites is price point. Above roughly $60,000 in my market the buyers start being people who've financed a house before, and those buyers ask why they don't get a deed, then they ask their brother-in-law who's an agent, and the deal slows down or dies. That ceiling is why I moved to deed and deed of trust on anything over $50k. It's a marketing decision as much as a legal one.

One operational note on the back office side, since this matters more than either camp usually says. Whichever structure you pick, decide early whether payments come directly or route through a licensed third-party servicer, because switching later means new payment instructions to every buyer and some fraction of them get lost to confusion. Servicers that handle both structures typically charge a setup fee per contract and want the documents in a specific order.

Trades angle nobody's raised. If your buyer wants a permit for a septic system or a pole barn, the county building department is going to ask for proof of ownership. In two counties I've worked in, a recorded memorandum of contract satisfied them and in one the clerk wanted a deed. If you're selling to people who intend to build, the deed-at-closing version saves you phone calls you'd rather not be on.

@mitchell_ray4 that is a good practical filter. Recreation buyer, contract for deed is fine. Building buyer, give them the deed.

This reads a lot like the lease option arguments on the rental side, right down to the part where the seller thinks they have a fast remedy and then a judge treats the buyer as an owner with equity. A pattern that shows up repeatedly is that the more the buyer has paid and the longer they've been in possession, the less the label on the paperwork protects the seller. Not a legal opinion, just a pattern worth watching for.

In one sentence, what does the buyer actually own during the contract for deed period?

@jessreyes12 possession and equitable title generally means the right to get legal title by finishing the payments, and a claim a court will usually protect against being stripped after a buyer has paid a lot. Legal title stays with the seller until the last payment. That is the general shape, and the details run on state law, so treat that as vocabulary rather than a ruling. @tylerbrooks9 on the actual question, the thing worth weighing is who else has to read the paperwork over the next several years. A county treasurer, maybe a title company at payoff, possibly a note buyer, possibly a probate court if the buyer dies mid-contract. Every one of those readers finds a recorded deed and a recorded lien easier than an unrecorded contract, which is the case for the deed-and-lien structure even where @carlos_nunez's cost numbers on early defaults are correct.

The payoff question is worth working through slowly, since it defines what the end of the term actually looks like. On a contract for deed eight years out, who prepares and records the deed, and what happens if the seller has moved, changed entities, or died in the meantime? On a mortgage, the release tends to be a simpler document to get signed by whoever is holding the file by then, which is one real advantage of that structure over a long installment contract.

For a seller who wants the version with the fewest phone calls, this thread points to a deed at closing with a recorded lien and a third party servicer, at the price of a slightly thinner net. Does anyone see a case where that trade runs the other direction?

I had to read @nicole_adeyemi's post twice to get equitable title, and I think I have it now. Thank you for using the actual words instead of around them.

@priya_n21 you are right about the calls. At 30 or so accounts the admin difference is what deserves the most weight. Sellers who hold a mix consistently report that the contract accounts generate more of the questions, mostly tax bills arriving at the seller's address and buyers wanting to know why the county still has the seller's name on the parcel. The mortgage accounts mostly just pay.

Voted option two. My reason is a contract I inherited when I bought a small package of paper years ago. Buyer was in year six of ten, had paid roughly 60%, then stopped after a divorce. The forfeiture language in that contract was aggressive and my attorney's read was that it would not survive a challenge in that state. We settled at a discounted payoff funded by his brother and I still made money, but the six months of uncertainty was worth more to me than the interest spread I gave up.

Patience is fine as a strategy. Patience while waiting on a court is a different thing.

@nicole_adeyemi that's it, thank you. And @karen_whitfield's story is the version I'll remember, because the paperwork advantage only shows up in the year the buyer's life goes sideways.

@hannah_west29 fair on the cleanup, and that input deserves widening. Run your version, a 30% chance of a $4,000 cleanup and a 15% resale haircut, and the early default case goes from a $5,220 net gain to roughly break even after the second sale closes, with the whole edge moving into the interest collected from the buyers who pay. Which straightforwardly means the underwrite has to work on the cash price alone before a single month of interest is added to it. @karen_whitfield's case is the one to size hardest. Late default with heavy buyer equity is where the structure decides the outcome, and everything upstream of that is marketing preference.