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.
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.
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. The ability to buy any property because everyone qualifies as long as the seller agrees to sell the property using a Bond For Deed.
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.
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.
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.
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%.