WRAP AROUND LOANS
The Contract for Deed is often referred to as a "wrap around" loan because it includes or "wraps around" the existing loan on the property. Wrap around loans are very flexible. The existing financing is what it is, but the parties can agree on Contract for Deed loan terms different than the existing loan.
Here are some examples:
The Seller's loan might have 25 years to run but the Contract for Deed could be due in 5 giving the Buyer time for the market to correct but also giving the Seller the security of knowing the transaction will not go on "forever." Actually, the longer the transaction goes on, the more secure the Seller becomes. The property should appreciate in value, every payment reduces the loan balance and the Buyer's growing equity means the Buyer is less likely to default.
If the Buyer does not have enough down payment to pay the Seller's equity, the Seller could accept a smaller down payment and defer receiving the rest of the money until the Contract is paid off. In the meantime, the Seller might receive a monthly payment from the buyer on his portion of the loan. The wrap around loan could be structured to pay the Seller in 3 years and the existing loan balance in 5.
The Seller can realize a profit on the financing by charging the Buyer a higher interest rate than he pays on the existing financing. For example, if the existing loan is $300,000 at 4%, the Seller pays $12,000 per year in interest. If the Seller charges the Buyer 6%, he receives $18,000 for a $6,000 profit each year. Over 5 years the profit is $30,000. This is an incentive for the Seller to accept a lower selling price. A lower sale price sells the property faster, makes the Buyer happy and reduces the cash down payment. This is a very attractive and often overlooked advantage of Contract for Deed financing.
Alternatively, the Seller might offer the incentive of a lower monthly payment. The Seller would make up the difference – similar to renting at a small loss but without the ownership responsibilities. It is better to pay $100 a month toward the transaction than face foreclosure or a short sale. This is better than renting because the Buyer is responsible for maintenance and should have an "owner mentality" lessening the risks associated with renting.
The Contract could also be written with interest-only or graduated payments. Flexible financing without formal application makes the Contract for Deed very attractive to buyers.