Bond For Deed
A Bond for Deed is a contract to sell real estate property, in which the purchase price is to be paid by the buyer to the seller in installments. After the total amount is paid, the buyer receives the title from the seller. Whenever a real estate transaction involves financing, a Bond for Deed should be considered as an alternative method of financing.
Applicability
It is suggested that such a Bond for Deed contract should be considered for use by a Seller, Buyer, Broker or Agent whenever:
- The purchaser cannot qualify to obtain a new loan or to assume the existing loan, but the seller is satisfied with the purchasers credit.
- The property does not qualify for a new loan, but the purchaser is satisfied with the price and condition of the property.
- The required closing costs to obtain a new mortgage loan are prohibitive.
- Permission to assume is conditioned upon payment of an unreasonable transfer fee (such as 1% or 2% of the loan balance) and/or in an increase in the interest rate on the existing loan.
- The due on sale clause in a mortgage (or the La. statutory due on sale found in R.S. 6:833) is used by the lender to prohibit any assumption of the existing loan(s).
- The seller desires to maintain the security of retaining title and eliminating the legal expense and delays of a judicial foreclosure in the event of a default by the purchaser. This is particularly beneficial if the seller finances a portion of the purchase price.
- The seller agrees to allow the purchaser to assume or take over responsibility for the mortgage payments, but requires that the purchaser must refinance and pay off the existing mortgage loan within a specified period of time (such as within five years).
- Any combination of the above.
FAQ
Most frequent questions and answers
The Bond for Deed contract is assignable to a third party. Typically such an Assignment is made by the Purchaser to a third party. Typically such an Assignment is made by the Purchaser to a new Purchaser who takes over the rights and responsibilities of the original Purchaser.
The death of a Seller or Buyer does not affect the validity of a Bond for Deed. As a heritable contract under La. Civil Code Articles 1765 & 1984, it is effective by or against the heirs or estate of a descendent.
The Homestead Exemption is not available in some La. Parishes, such as Jefferson and some Districts in Orleans; it has been granted in other parishes and some Orleans Districts.
Along with the responsibility for repairs, maintenance, etc., is transferred to the Purchaser at the closing of the Bond for Deed contract.
Is carried by the Purchaser in the names of all parties-Seller, Purchaser, and Mortgagee(s).
Is available to insure the validity of the Seller’s title that is to be conveyed to the purchaser under the Bond for Deed-subject to the express condition that the Purchaser pay the amounts contracted for or in the Bond for Deed.
In the event the Seller files a bankruptcy action, the Purchaser is protected by the Bankruptcy Code, 11 U.S.C., Sec. 365 (i) and the law as applied in the case of In Re Smith, 71 B.R. 754 (Bankruptcy M.D. La.)
In the event of default by either party, the other party may sue for Specific Performance. Additionally the Seller may have the Bond for Deed cancelled in accordance with the provisions of R.S. 9:2945 as explained above. In such event, the Seller need not file a foreclosure suit to reacquire title of the property.
The I.R.S. treats a Bond for Deed the same as a Sale. Accordingly, the determination of gain or loss by the Seller and deductions for interest or depreciation expense by the Purchaser is treated the same as if there had been an ordinary sale. The case law on this point is found in:
Our Bond for Deed contract provides that the Seller give a power of attorney to the named Escrow Agent empowering the Escrow Agent to transfer title to the subject property in accordance with the provisions of the contract. This protects the Purchaser in the event the Seller has moved away or it is otherwise inconvenient for the Seller to appear at Act of Sale after the Purchaser has made all payments.
The Bond for Deed contract is recorded in both the conveyance and mortgage records. Additionally, we include a special mortgage in favor of the Purchaser to protect the Purchaser’s rights in the event of a subsequently arising encumbrance, such as a judgment or an I.R.S. tax lien. The rights of the Purchaser are superior to subsequently recorded inscriptions.
The Purchaser can take title in his own name at any time by paying the balance due on the Bond for Deed. Mostly commonly this occurs by refinancing (if interest rates go down) or reapplying to qualify for an assumption of the existing mortgage.
