LOUISIANA BOND FOR DEED TRANSACTIONS
Louisiana commercial property title transfers are normally more complex than residential transactions.
A Bond for Deed (BFD) transaction is a Louisiana real estate contract in which the purchase price is paid in installments, and a title is transferred after the payments are made in full. The crucial thing about Bond for Deed is that only the buyer and seller need to agree on the terms of the deal. The parties do not have to pay for appraisals, origination fees, or points.
WHAT IS A BOND FOR DEED CONTRACT?
A Bond for Deed (BFD) is defined as a contractual agreement to sell real estate property in which the purchase price is to be paid by the buyer to the seller in installments, and in which the seller agrees to deliver the title to the buyer after payment of a stipulated sum. This process is very similar to what some other states call a conditional sale, contract for deed, or land contract.
Another way to explain the process is that the seller finances the purchase but ultimately transfers the title after all payments have been made on it, holding the BFD contract as a lien against the property. These agreements are often used for Louisiana homes that are otherwise difficult to sell or finance.
WHEN TO USE A BOND FOR DEED CONTRACT?
A BFD contract can be used in all real estate transactions. It is also used extensively when an owner is owner-financing the transaction. Parties can be very creative with the use of wrap-around or balloon clauses. Some even have the seller and the buyer both making mortgage payments when the property sells for less than the existing mortgage.
Below are some common situations when a Bond for Deed can be used.
Louisiana Bond for Deed Agreement FREE download!
PROS AND CONS OF USING BOND FOR DEED
Besides allowing the buyer and seller to work out an arrangement much faster and with more flexibility than with a standard bank loan, there are many other important considerations. To help you figure out whether this is the best solution for your real estate transaction, here are some benefits and drawbacks of a bond for deed contract.
Pros for the BUYER
- A great (and often only) opportunity for buyers without traditional financing options.
- Lower closing costs and better interest terms compared to conventional financing.
- The purchaser can deduct any interest portion of their payments on their federal income taxes since the IRS sees a bond for deed as a sale.
- No lender approval is required and there is no need for an appraisal.
- Everyone qualifies to buy a home as long as the seller agrees to use a bond for deed contract to sell the property.
- Past bankruptcy or other credit problems will not prevent a sale. In other words, those with less than perfect credit can use a BFD to buy property.
- A purchaser in a BFD contract is building equity in the property they are purchasing. Since a personal residence is often the single largest source of wealth for Louisiana households, this equity can be the key to moving into financial security.
- In many cases, a BFD purchaser is someone who has never owned a home prior to this transaction and would not have been able to acquire the financing to purchase a home in a conventional manner.
- Once the purchaser is a property owner and not merely a renter, he has the option to sell as long as he can pay the sums due under the terms of the bond for deed.
Cons for the BUYER
- Purchasers cannot use their properties as collateral for home equity or other loans since they don’t have full, legal title to them.
- If a buyer defaults, a bond for deed can be foreclosed or forfeited, which is often a very short process and in some states easier to implement than a foreclosure of traditional mortgage loans.
- There is a possibility (though it’s highly unlikely) that the seller won’t deliver the deed once the property is completely paid off. This may happen because of different reasons, like disability, death, different title problems, or even dispute over payment history.
- In some cases, the seller may be dishonest or a divorced couple may disagree on financial matters.
- Finally, the seller may not make underlying tax or insurance payments. This is why it is crucial to use an independent and experienced bond for deed servicing company.
Pros for the SELLER
- The seller can get a better price for the property than an appraiser might estimate, gaining the ability to sell property in poor physical condition to a buyer willing to improve it.
- Peace of mind knowing that the property’s title will not officially transfer until all payments have been made.
- If a buyer defaults on their obligations, the seller can quickly and cheaply reclaim their property – in 45 days. This is significantly faster than to foreclose on a credit sale or other form of mortgage. It is also much cheaper than going to a sheriff’s sale.
- A seller can report their transactions as installment sales on IRS form 6252.
- They can pay taxes on capital gains or profit over the years of the contract rather than all at once.
- Wider pool of available buyers and better chances of a sale.
- The seller can sell the property for whatever the buyer is willing to pay. The seller can also add other terms, such as the balloon payment after a specified term.
Cons for the SELLER
- If the purchaser defaults on their obligations under the BFD contract, they will need to come up with approximately two months of mortgage payments to bring their mortgage current.
- Sellers do not receive their sale proceeds all at once, but rather over many years.
- They cannot claim depreciation, property tax deductions, and similar benefits.
- In the case of a current mortgage on a home that is sold using a contract for deed, the seller may violate their loan’s due-on-sale clause, which allows the lender to call the loan in.
- Generally speaking, contract for deed homes which are repossessed by their sellers can suffer depreciation as well as loss of value.
- The biggest potential hazard to the seller is that the purchaser may not make their payments on time, and this may affect the seller’s credit rating. The sellers can, of course, make the payment themselves in order to prevent it from becoming late.
- More information about seller concerns can be found in the section what happens if the purchaser defaults?
KEY THINGS TO REMEMBER ABOUT BOND FOR DEED
BOND FOR DEED SERVICES IN LOUISIANA
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