What is a Bond for Deed Contract?
A Bond for Deed (BFD) is defined as a contractual agreement to sell real 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 title to the buyer after payment of a stipulated sum. This process is very similar to what some other states call a conditional sale or land contract. Another way to explain the process is that the seller finances the purchase but ultimately transfers title after all payments have been made on it, holding the BFD contract as a lien against the property.
Similarity and the differences between Bond for Deed and Owner Financing
People often get confused when it comes to these two terms. Bond for Deed is one type of owner financing, but there are others, such as a credit sale. The bond for deed requires the buyer to make all payments before the title transfers, while a credit sale transfers title at closing.
In both cases, the buyer makes payments to the seller directly, repairs on the property (and even the property’s value) can be negotiated between buyer and seller without requiring an external appraisal, and terms of repayment can be non-traditional (such as interest only for a period of time, then standard amortizing, then a balloon clause, whereby the buyer gets a traditional bank loan once they have enough equity in the property to qualify for traditional financing).
Pros and cons of using Bond for Deed
The best thing about Bond for Deed is that both the buyer and the seller can work on the sales process much faster and with more flexibility than with a standard bank loan. In addition, because the Bond for Deed is an agreement between buyer and seller, bad credit is not an impediment to the purchase. People who had a bout of bad luck or a job loss or divorce can still buy a home.
Cons include the lack of a required appraisal, potential for more competition for a property when a seller is willing to owner-finance, and the relatively easy process of losing the title to the property if the buyer fails to make payments as required by the contract.
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.
The best thing to remember would definitely be that only the buyer and seller need to agree on the terms of the deal. That means the parties do not have to pay for appraisals, origination fees or points.
Summary of seller benefits
For sellers, the benefits include getting 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, and the safety of knowing that the property’s title will not officially transfer until all payments have been made.
Another benefit is that if a buyer defaults on their obligations, the seller can quickly and cheaply reclaim their property. Forty-five (45) days after the default letter is sent to the purchaser via registered or certified mail the owner may institute an eviction proceeding. 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. Besides that, the seller is able to negotiate the sales price with the buyer.
Summary of seller concerns
The seller must also be aware that 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. It is best to bring a payment before the first of the month so that the payments are not late. The purchaser has forty-five days after default to bring the payments up to date, and those two months of missed payments will have to be paid by the seller if the purchaser cannot cure the default.
Generally the seller in a BFD purchase receives a cash payment for their equity at the closing, and their real estate agent may recommend that they make sure to save a portion of these sums in case of a problem or deposit sums with the escrow agent to be used to keep a mortgage current in case of buyer default. Also, more information about seller concerns can be found in ‘the ‘Possibility for vandalism” section.
Summary of buyer benefits
There are benefits to the buyer of using a Bond For Deed transaction. No lender approval is required and no need for an appraisal. That is exactly what makes this whole process easier — the contract is negotiated between the parties and is not dependent upon locating the proper financing. This also makes the process more certain than traditional bank financing.
The purchaser in a BFD is able to deduct the interest portion of their payments on their federal income taxes. Their agent should make their purchaser aware of this advantage too. The escrow company will send a 1098 interest statement to the buyer on or before January 31st of the following year. Besides that, buying a property in such way is much cheaper, and the buyer will be able to escape all those fees connected with a mortgage (such as appraisals, credit reports, origination points, and so on). Besides that, the buyer can have less than perfect credit and still execute a bond for deed contract.
Under a bond for deed contract, everyone qualifies to buy a home as long as the seller agrees to sell the property using a Bond For Deed. The agent should make certain that the buyer will be able to make the monthly payments, but concerns like a past bankruptcy or other credit problems will not prevent a sale.
Summary of buyer concerns
Buyers are mostly concerned that the seller won’t deliver the deed once the property is completely paid off. It may happen because of different reasons, like disability, death, different title problems or even dispute over payment history. The buyer is also concerned because the seller may be dishonest.
It may happen that the seller may be a divorced couple. That couple may disagree on financial matters, and it can all affect the buyer’s expectations.
Buyers may also be concerned about the seller not making underlying tax or insurance payments, making it important to use an independent and experienced bond for deed servicing company, such as Southern Loan Servicing, Louisiana’s largest bond for deed servicing company.
How does a Louisiana Bond for Deed Transaction Work?
In theory, a Louisiana Bond for Deed contract can be used for any real estate transaction. In practice, though, we find that it will work in terms that everyone can live with only 15% to 20% of the time. In those cases, the Bond for Deed provides a unique way to transfer a property’s title that would be otherwise unavailable under traditional financing mechanisms.
What makes a BFD unique is the flexibility it provides when structuring a real estate transaction. You can structure it like an assumption of a mortgage or like an owner financed deal, or even an assumption of a first mortgage with the seller carrying a second mortgage on the same property. The following examples show how a Bond for Deed contract works in practice:
- The buyer and seller agree on a sales price of $100,000 on a property that has an existing mortgage with a balance of $90,000. In this case, the buyer could put $10,000 down and assume the existing debt under a BFD at the same rate or a higher rate that the seller pays.
- If the property had no outstanding mortgage, then the same sales price of $100,000.00 can be completely financed by the property owner and the terms could be negotiated between the parties under any repayment plan that was agreeable to both parties.
The title is transferred on a Louisiana Bond for Deed contract when the buyer pays off the existing mortgage. This event usually occurs when the purchaser refinances the property to make a balloon payment under their Bond for Deed contract. The transfer of title is not automatic. The BFD must be canceled in the conveyance and mortgage records of the parish the property is located, and the cash sale must be filed with the courthouse in the same parish.
Assignation of the Bond for Deed
Unless prohibited in the original BFD contract, a Bond for Deed can be assigned to a third party (i.e. you can transfer a property you bought with a Bond for Deed to another party using a Bond for Deed). This second transfer may have different terms than the original Bond for Deed agreement, but they are additional terms and cannot conflict with the original terms.
When Southern Title closes a Bond for Deed transaction in the New Orleans area, we always execute a cash sale and an agreement to hold the cash sale in escrow. This is done to protect the purchaser and for the convenience of the seller.
Southern Title, Inc. is proud to have been Louisiana’s first licensed escrow agent for Bond for Deed transactions, which allows a property’s title to be transferred only after all payments have been made on it. See LA Rev Stat § 9:2941
What benefits does a Purchaser have entering a Bond for Deed Contract?
Buyers can benefit from using a Bond for Deed transaction in a number of ways, mainly through an easy purchase process that is faster and lower cost than a traditional mortgage.
Income tax deduction for a buyer
There are benefits to a buyer in a BFD transaction. The purchaser is able to deduct the interest portion of their payments on their federal income taxes. Their agent should make their purchaser aware of this advantage. The escrow company will send a 1098 interest statement to the buyer on or before January 31st of the following year.
Can cost less than going through financial institution
Purchasing property by BFD can be significantly cheaper than acquiring financing thru a lending institution. There are no mortgage company fees, such as appraisals, credit reports, origination points, and so on. This savings can mean thousands of dollars to the purchaser. It is also much cheaper than doing an assumption of a mortgage, where many of the same fees apply.
Lack of lender approvals
There are also no lender approval issues. The contract is negotiated between the parties and is not dependent upon locating the proper financing. This makes the process much quicker and more certain. Since there is not an issue of Lender approval, the buyer can have less than perfect credit and still execute a bond for deed contract. The agent should make certain that the buyer will be able to make the monthly payments, but concerns like a past bankruptcy or other credit problems will not prevent a sale.
Good for buyers with less than great credit
Since there is not an issue of Lender approval, the buyer can have less than perfect credit and still execute a bond for deed contract.
The agent should make certain that the buyer will be able to make the monthly payments, but concerns like a past bankruptcy or other credit problems will not prevent a sale.
No need for an appraisal
Lenders require an appraisal to verify that they are not loaning more than their stated loan to value limits. Under a Bond for Deed, this requirement disappears. A buyer and seller can agree on the property’s value under terms that are mutually agreeable.
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.
Often used by first time homebuyers
There is a pride of ownership and sense of community instilled in the buyer. 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.
Purchaser may sell the property at any time (provided he can pay the sums outstanding on the BFD)
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.
What benefits does a Seller have entering a Bond for Deed Contract?
Property sellers using a Bond for Deed have a number of advantages over traditional sales.
Advantageous Pricing & no need for appraised value limitations
There are many benefits to a seller in a BFD transaction. The seller and buyer negotiate the sales price between themselves and do not have to concern themselves with the appraised value. 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.
Pricing negotiated solely between buyer and seller
The seller and buyer negotiate the sales price between themselves and do not have to concern themselves with the appraised value. The seller can also add other terms, such as the balloon payment after a specified term.
Seller can sell property that is dilapidated or hard to borrow against
A seller can also use a BFD to sell property that is dilapidated or for whatever reason has little value as collateral.
Collateral Value can be used for buyer to renovate then refinance
It can be difficult to sell the property where a buyer cannot obtain the necessary financing. The purchaser can repair the property and then acquire the financing to pay off the BFD. A seller can also use a Bond for Deed to sell property that is dilapidated or for whatever reason has little value as collateral.
In case of default, seller can quickly and relatively inexpensively reclaim property
Another benefit is that if a buyer defaults on their obligations, the seller can quickly and cheaply reclaim their property.
Forty-five (45) days after the default letter is sent to the purchaser via registered or certified mail the owner may institute an eviction proceeding.
Much faster than foreclosure and less expensive than Sheriff’s sale
This is significantly faster than to foreclose on a credit sale or other form of a mortgage. It is also much cheaper than going to a sheriff’s sale. Payments may be made directly to the seller if the property is not encumbered by a mortgage.
However, if a mortgage exists then all payments must be made to a licensed escrow company, authorized to do business in Louisiana under the control of the Commissioner of Financial Institutions.
The payments shall be distributed by the escrow agent between seller and lien holder in such proportion as the received obligation bears to purchase price in order to ensure the buyer an unencumbered title when all payments have been made as provided in the BFD Contract.
What happens if the Purchaser defaults on the Bond for Deed Contract? What should Bond for Deed Sellers know?
There are both legal and practical issues to consider when selling a property using a Bond for Deed contract.
Legal process of default
If the buyer under a BFD contract fails to make payment in accordance with its terms and conditions to the seller, then the seller may have the BFD contract canceled by the proper legal registry (the courthouse or the mortgage and conveyance office). The seller must first give the buyer 45 days prior notice via registered or certified mail of his intent to cancel if all amounts due have not been paid. This default notice requirement is mandatory and may not be waived.
The purpose of the escrow agent in a BFD contract is to protect the buyer from fraud and to assure proper apportionment of payment between seller and mortgagee. Also, escrow agent’s role depends upon the needs of the purchaser and seller. The main function is to collect and remit payments to either the seller or mortgage holder or both.
NOTE: There are only eleven (11) state-licensed escrow agents in Louisiana.
Purchaser defaults – Two months of mortgage payments needed to bring current
The seller must also be aware that if the purchaser defaults on their obligations under the BFD contract, they will often have to pay approximately two months of mortgage payments to bring their mortgage current. Sellers should, therefore, set a Bond for Deed payment date before the first of the month so that any underlying mortgage payments due to the mortgage holder are not late. The purchaser has forty-five days after default to bring any unpaid payments up to date. Generally, the seller in a BFD purchase receives a cash payment for their equity at the closing, and their real estate agent may recommend that they save a portion of these sums with the escrow agent to be used to keep a mortgage current in case of default.
Large cash payments at closing may require reimbursement
In a situation where a buyer defaults after placing a large cash payment at the closing, it is possible that the seller may have to reimburse the purchaser some of that money. The law does not allow one party in a contract to be unjustly enriched in this manner. The actual amount would, of course, be reduced by costs associated with the sale and loss of opportunity to sell the property, so it would have to be a large cash sum to require any sort of reimbursement. There is also a recent bankruptcy case where the Trustee went after the seller to get a portion of the down payment back.
Title transfers under a Bond for Deed Contract
A BFD contract does not transfer title to the purchaser until the full purchase price is paid and the seller delivers title to the buyer. In a well-crafted bond for deed, the transfer of title is automatic upon completion of payments. However, not all bond for deed contracts are well-crafted.
The BFD must contain a provision that the seller for the stipulated sum agrees to deliver title to the buyer. In the absence of such a provision, the parties will have executed either a contract to sell or completed contract of sale depending upon their intent but not a BFD.
Possibility for vandalism
While it is possible that a buyer who was near default on their Louisiana Bond for Deed contract would damage or vandalize the property before they were evicted, in our experience, this is an extremely rare occurrence. Sometimes the purchaser has in fact improved the property, even when facing default. This is also an issue for anyone who rents property and is something the real estate agent should keep in mind when considering to use a Bond for Deed contract for their clients.
Due on sale provisions
The first issue to be aware of are the laws pertaining to Due-on-sale provisions and their effects on a BFD contract. A Bond for Deed may trigger a Due on Sale Clause, meaning the mortgage lien holder can demand payment in full. The Due-on-sale clause from the Louisiana-Single Family-Fannie Mae/Freddie Mac Uniform Instrument is as follows:
“Transfer of Property or a Beneficial Interest in Borrower. As used in this Section18, “Interest in the Property” means any legal or beneficial interest in the Property, including, but not limited to, those beneficial interest transferred in a bond for deed, contract for deed, installment sales contract or escrow agreement, the intent of which is the transfer of title by Borrower at a future date to a purchaser.
If all or any part of the Property or any Interest in the Property is sold o transferred (or if Borrower is not a natural person and a beneficial interest in Borrower is sold or transferred) without Lender’s prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited by Applicable Law.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is given in accordance with Section 15 within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.”
The title company working with you on the transaction will determine if there are relevant Due on Sale clauses that would prevent a bond for deed contract’s use for a particular property.
Death of seller
An issue to be aware of is the potential problem with the death of a seller. If there is not an executed cash sale in escrow, the seller’s succession would have to be opened in order to transfer title, and that can become very expensive. We execute a cash sale and an Escrow Agreement at closing to prevent this complication.
Since the sellers retain ownership of the subject property until all installments are paid, after recordation of the BFD contract, a creditor of theirs may not obtain a judgment that could attach to the subject property because recent Legislation prevents that from happening. (Effective October 2007)
Borrowing against equity
A minor issue for the buyer is that since they do not have the title vested in their name, they cannot borrow against their equity in the property. The best way to resolve this problem is for the buyer to refinance and place the property under their name when it is feasible. We recommend that the parties stipulate a date for a balloon payment in their BFD contract.
Biggest hazard for sellers: not being paid on time
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. The sellers may use part of the down payment to maintain an extra payment in escrow.
We recommend that the Seller include a balloon payment term in the BFD contract so that they can limit their potential liability for this type of problem. Note that the escrow company should notify the seller immediately if a payment has not been received. We then mail a default notice to both the purchaser and seller via certified mail.
Mortgage debt remains in seller’s name
A seller in a BFD must be aware that the existing mortgage is a debt that is in their name. If they wish to apply for a loan, they need to be aware that the existing loan may prevent them from borrowing any new funds. And as was mentioned above, if the buyer is not making payments on time, this may affect the seller’s credit rating. In practice, it is normally the case that a mortgage company will give the seller credit as income the payments on the BFD, and it generally varies between 80% to 100%.