Real Estate Contract Options in Washington
Alternative financing can have pros and cons for both buyer and seller
By Judy Malmon, J.D.Use these links to jump to different sections:
- What Is a Real Estate Contract?
- Pros and Cons of a Real Estate Contract for the Buyer
- Pros and Cons of a Real Estate Contract for the Seller
- Get Legal Help for Your Real Estate Contract
If you’re buying or selling real property, certain procedures and financing options are so commonplace they’re unquestioned in many transactions. But, because purchasing or selling a home is one of the most significant financial events in a person’s life, a one-size-fits-all solution is hardly the best choice.
One choice to consider, whether you’re the buyer or the seller, is a real estate contract—also known as a purchase contract for deed or land installment contract.
What Is a Real Estate Contract?
In Washington state, a real estate contract is an alternative 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 real estate purchase price is paid in full, though the buyer maintains possession for the payment term and does not 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 of a Real Estate Contract for the Buyer
A real estate contract can be attractive to a buyer for any of the following reasons:
- The buyer can’t get a traditional mortgage due to poor credit, inadequate employment history, or other reasons but can manage regular monthly payments and possession of the property
- There are no origination fees or closing costs, which can save thousands of dollars
- Smaller down payments are often involved
- 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
However, buyers should consider the following potential downsides to a real estate contract:
- The buyer doesn’t own the property until the contract is paid in full
- The buyer must arrange and pay for a title search, title insurance, appraisal, and property inspection
- The 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 canceling the contract or pursuing foreclosure
- If the buyer uses contract payments to improve their credit score so they can get a mortgage, they are dependent on the seller to report payments to a credit agency
Pros and Cons of a Real Estate Contract for the Seller
The upsides of a real estate contract for a seller include:
- The sale can be quick and efficient, saving costs and delays of bank financing
- Title examination and appraisal are the responsibility of the home buyer (note, however, 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 the term of contract
- The seller won’t receive all money until the completion of the contract
- Negotiating and enforcing the contract will take more ongoing effort than would an outright sale
Get Legal Help for Your Real Estate Contract
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 purchase agreement. Paying a lawyer for legal advice to assist with a real estate contract can cost considerably less than real estate agent 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.
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