There are many ways to invest in Real Estate.  This is one of the best ways for someone to get started without any out of pocket investment.  If you are a person with several thousands of dollars to invest in Real Estate there are many other options available to you.  This also gives you a very good return on your investment.

The contract for deed or sometimes referred to as installment land contract is an effective financing tool recently rediscovered by Realtors, Property Owners and Investors. The Contract for Deed is a method of selling property by allowing the buyer to purchase subject to an existing mortgage. It constitutes a quasi-transfer of title that involves an Escrow Agent as an intermediary and loan servicing agent. This Contract for Deed method is good for those people that are self employed or have credit blemishes. It also can be a good way for sellers to maximize their profits by carrying the note and deed of trust for a buyer. The seller not only can get a portion of their equity up front, but can also receive a monthly interest payment.

For the investor it is much safer then carrying a second deed of trust. In the event that the buyer defaults on their loan the investor can sell the property or carry a loan for someone else and will not suffer any loss. Also the investor will retain any equity that has accumulated on the property. The investor is always in first position and therefore does not have to be concerned about a short sale or loss due to being in second position. This is important if you are in a declining market.

This program is designed to benefit all parties involved. To insure that this is a win win situation, the first thing I do when a buyer comes to me is try and get them conventional financing if possible. I would be doing them a disservice to put them into this program if they could get their own loan without the assistance of an investor. This program is the next best thing for a buyer if they cannot quality for a loan. There are a lot of guidelines that have to be implemented to protect the property and all parties involved with the transaction.

Up to now we have been discussing what is a contract for deed. I think it is important to disclose what it is not. It is NOT a rent to own. It is NOT an assumption of a loan. It is NOT a lease option.

Like with any investment you need to know all the advantages to this type of transaction.  You also must be aware of all the possible Pitfalls and disadvantages to this type of transaction.  Below is an article writen by an attorney discussing some of these pitfalls.  Attorney Jonathan A. Goodman words are in blue print.  All other comments are mine in black print.

Pitfalls of Land Installment Contracts by Jonathan A. Goodman, Esq.

What are the pitfalls of structuring a seller-financed transaction through an installment land contract? Though the Real Estate Commission dropped its approval of the use of Installment Land Contracts ("ILCs"), consumers still frequently ask brokers about ILCs. Even in its pre-disapproval comments, the Manual stated: "this instrument is full of pitfalls for both buyer and seller, and may be used under circumstances to the injury of the buyer and, under other circumstances, to the injury of the seller." The intent of this article is to explain these pitfalls.

Pitfalls for Sellers

What happens if the buyer defaults? Most forms provide that the seller, after complying with certain notice requirements, is entitled to have the escrow agent return the escrowed deed. Most forms also provide that the seller is entitled to immediate possession of the property. In spite of this language, obtaining title and possession may not be a simple matter. If the buyer refuses to relinquish possession voluntarily, the seller would typically commence an eviction action. The buyer, however, may be able to successfully argue that he had an "equitable" interest in the property which could only be extinguished through a foreclosure or quiet title action. A foreclosure on an ILC takes place through the courts, rather than through the public trustee's office. A public trustee foreclosure on a deed of trust requires approximately five months through the end of the owner's redemption period. A contested judicial foreclosure on an ILC demands anywhere from one to two years. During a foreclosure, the buyer might be able to stay in the property without making payments to the seller. In the meantime, the seller may need to make payments to a senior lender to prevent foreclosure on the underlying loan, a potential deficiency judgment, and detrimental effects to the seller's credit rating. It is rare that sellers recover these sums from buyers. The most efficient way for the seller to take the property back is through a deed signed and delivered by the buyer to the seller subsequent to the purchaser's default. Unfortunately, after they default, many buyers cannot be counted on to execute deeds (and the other paperwork necessary for a deed-in-lieu transaction) back to the seller. To address this problem, some ILCs are set up such that a deed from the buyer to the seller is executed and held unrecorded by the escrow agent. If the buyer defaults, the escrow agent is supposed to return this deed to the seller for recording. Yet there are several features of this "solution" which are problematic: (1) escrow agents, after being confronted with different demands for the deeds, may not release them, or may only release them to courts; (2) Colorado law makes it clear that a deed held in escrow to secure performance of an obligation is a mortgage which must be foreclosed through the courts to extinguish the purchaser's interest in the property; and (3) before the transfer of the deed, liens may attach to the property through the buyer. If so, the transfer from the buyer back to the seller after default is subject to the intervening liens.

Pitfalls for Buyers

Often, the primary motivation for ILCs is based on the misconception that they avoid due-on-transfer clauses contained in a seller's underlying loan. Because a sale using an ILC is still a "transfer," it triggers the lender's ability to accelerate the underlying loan. Knowing this, some sellers use unrecorded ILCs. While the buyer is making its payments under an unrecorded ILC, liens could attach to the property through the seller (through no fault of the buyer) which would prevent the seller from transferring free and clear title at the end of the payment period. With unrecorded ILCs the buyer is at the mercy of the seller with respect to encumbrances such as tax and judgment liens. If the seller did allow these liens to attach, it is unlikely that he would be able to pay the sums necessary to remove them at the end of the payment period. Though the buyer would have an excellent lawsuit against the seller, the seller may be bankrupt (preventing the lawsuit) or insolvent (precluding the suit's effectiveness). A further problem for purchasers is that most ILC forms are seller-oriented documents which fail to provide adequate remedies for a purchaser in the event of a seller's default. For example, most forms fail to explicitly permit a purchaser to stop making payments to a Seller who has defaulted on his obligation to pay senior encumbrances.

Pitfalls for Both Sellers and Buyers

As noted previously, ILCs do not avoid the consequences of due-on-transfer clauses contained within the seller's underlying loan. Whether recorded or unrecorded, a sale using an ILC could trigger the underlying lender to call its loan. Depending on the stage at which this occurs, the acceleration could have dire consequences for both the buyer and the seller. Few ILCs address what will happen in the event the underlying loan is called. Is it the seller's responsibility to refinance? Is it the buyer's responsibility? What if neither the buyer nor the seller is able to refinance? What if one or the other is only able to refinance under terms less favorable than the original loan? The seller risks damage to his credit rating and a lawsuit for the deficiency balance which may remain on the note after the foreclosure. The buyer risks the equity he has built in the property. There is some sense in the real estate community that ILCs may be used to avoid the need to obtain approval from cities or counties for Senate Bill 35 subdivisions. Sellers convey a portion of their lot with an ILC in the hope that they need not obtain approval for the subdivision. The hope is unfounded, ILCs do not avoid the necessity of obtaining government approval of subdivisions. In 1992, the Colorado legislature began requiring the public trustee in each county to act as a tax escrow agent for all installment land contracts. This provision may cause problems for both buyer and seller as it may effectively require two tax escrows, the one maintained by the first mortgage lender, and the one required by the statute. Failure to comply with the statute may allow the buyer to void the ILC. Installment land contracts are fraught with danger and have few advantages over notes and deeds of trust. They should be avoided.

There are some common sense remedies that can be initiated to prevent some of these above pitfalls.  I have done many of these transactions and have not experienced any of the above pitfalls.  We have had some buyers default on their loans because of job loss, devorce or other financial difficullties.  We have had to take the property back and sell it again and in most cases there was no loss to the investors. The worse case scenario was an investor that had to make payments on the property until it was sold. This obviousley cut into the profit margin on that particular property.

95% of the time the investors are making a good return on their investment. The buyers are happy to own a home and enjoy the benifits of home ownership.  Many have refinanced into a better interest rate.

In any venture there are pitfalls.  If it were not so everybody would be  doing it. There are many things a person can invest in. Some people are happy with the small return they get on CD's or stock market.  Some are more aggresive.  You have to find your particular comfort level when it comes to investing. 

I will pass this little bit of wisdom to you that took me many years to learn. Everyone in this world would make much better decisions if they would use the professionals in that field that they are dealing with.  There is safety in a multitude of councel.  You need to have at least 5 professionals in your life that you can trust for advise.  It costs you nothing and it will ultimately save you money, make you money and increase the quality of your life. (1) A good Family doctor, (2) A good Attorney, (3) a good Realtor, (4) a good Tax Person, (5) a good Financial Adviser.  Any time you can get good counsel from a professional in any area of life, you will be better for it. I just mentioned 5 the list goes on and on.

Ron Phillips