The pros and cons of contract home sales

A recent Des Moines Register story about a family’s misfortunes as they attempted to purchase a home on contract is a good reminder about the perils of this homebuying method. 

However, it doesn’t have to be this way. A contract sale should not be considered a shortcut to homeownership because in reality you still need to follow several of the same steps. First, you want to hire a real estate lawyer who will review your offer to purchase the home, as well as review the abstract to provide a title opinion. Reviewing the abstract is key because it determines the seller’s interest in the property.  We have heard horror stories about homes being “sold” by someone who didn’t even own the property,or how a property is discovered to be in default, leaving the contract buyer in limbo.

Second, you’ll need to have a home inspection. The city of Des Moines does require home inspection to be filed, but this is more a “buyer beware” and doesn’t necessarily spell out the faults of the property. With a detailed home inspection, you will know what is wrong with the property. Then, you can negotiate who is responsible for fixing during the contract process.

Does this sound like a conventional mortgage process? It’s pretty close, but it drops the middleman – the financial institution. There are pros and cons to this.  A contract sale allows you the opportunity to purchase a home with less money up front and fewer fees, but a mortgage gives you the indirect protection of the financial institution's due diligence.  This means the financial institution loaning you money wants to ensure their investment is a sound one.  So, they will do all the things necessary to make sure the asset (the property) is exactly as it was presented. 

So are contract sales bad? No, but they do provide an environment where unsavory sellers can take advantage of those not familiar with the home buying process. Make sure you know your rights – even if it costs a little more – before you venture down this path. And, we’re here to help as we can.

 




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