Real Estate Contract Options in Washington
Alternative financing arrangements can have advantages—and disadvantages
on March 1, 2018
Updated on January 27, 2023
If you’re buying or selling a house, certain procedures and financing options are so commonplace they’re unquestioned in many transactions. But, because the purchase or sale of a home is one of the most significant financial events in a person’s life, a one-size-fits-all solution is hardly ever the best choice.
One choice to consider, whether you’re the buyer or the seller, is a real estate contract—which is also known as a contract for deed or land installment contract.
What It Is
A real estate contract is an alternative in Washington to a traditional bank mortgage; it’s based on a direct contract, wherein the buyer makes regular monthly payments to the seller. No banks or approvals are required to enter into this type of arrangement, and generally there is considerably more flexibility—and more risk—because of this. Under an installment contract for real estate, the seller retains the title until the purchase price is paid in full, though the buyer maintains possession for the payment term and does own the property. Because the basis of the arrangement is a contract between the parties, creative solutions may be available to address individual concerns.
Pros and Cons: Buyer
A real estate contract can be attractive to a buyer because:
- The buyer can’t get a traditional mortgage due to poor credit, inadequate employment history or other reasons, but yet can manage regular monthly payments
- There are no origination fees or closing costs, which can save thousands of dollars
- Often a smaller down payment is required
- The process is quicker, simpler and more flexible than bank financing
- Interest can be deducted like mortgage interest
- Having a direct relationship with the seller allows for flexible negotiation on terms like price, payment schedule, pre-payment options, title encumbrances, and improvements
Downsides buyers should consider include:
- The buyer doesn’t own the property until the contract is paid in full
- Buyer must arrange and pay for title examination, appraisal and inspection
- Seller will generally set a higher rate of interest based on their increased risk
- There is a shorter time to cure default than with a traditional mortgage, and the seller has the option of either cancelling the contract or pursuing foreclosure
- If you’re using your contract payments to improve your credit so you can get a mortgage, you’re dependent on the seller to report payments to a credit agency
Pros and Cons: Seller
Upsides for a seller to consider:
- The sale can be quick and efficient, saving costs and delays of bank financing
- Title examination and appraisal are the responsibility of the buyer (note that Washington requires all sellers of residential real estate to provide disclosures to the buyer, including for defects you should know about)
- If you’re selling non-conforming property that wouldn’t qualify for financing
- Can be a way to earn regular income from owned real estate
- If the buyer defaults and the seller needs to reclaim the property, the forfeiture process usually takes around 100 days—which is quicker than a foreclosure.
- In the event of default, the seller may keep all money already paid, and also reclaim the property
- As with the buyer, having a direct negotiating relationship can allow for flexibility to meet individual needs
Concerns a seller may have include:
- There’s a risk that the buyer will default on payments
- The property will remain in your name for many years during term of contract
- The seller won’t receive all money until completion of contract
- Negotiating and enforcing the contract will take more ongoing effort than would an outright sale
The best way to ensure that a real estate contract is more advantageous than problematic is to work with a lawyer to negotiate and record a favorable agreement. Paying a lawyer to assist with a real estate contract can cost considerably less than the agency fees and closing costs associated with a typical real estate transaction; it’s well worth the protection.
If you think a real estate contract makes sense for your transaction, talk to a residential real estate attorney with experience drafting these kinds of agreements. For more information on this area, check out our overview of real estate laws.