Sometimes clients looking to cut costs on their next real estate closing have asked about the possibility of a "cash for deed." What does that mean, what are the risks, and how can this strategy save you money on your upcoming closing? We will try to answer these questions for you.
What is a cash for deed?
A cash deed is involves the sale of a property for cash. Usually, the process is between two parties and doesn't involve a mortgage lender or line of credit. It is, as the name implies, a cash sale. The deed must be signed in the presence of a notary so that it can be recorded.
Is a cash deed a good route to take?
It was once asked whether or not a “cash for deed transaction” is a good idea sale of a property for three thousand dollars. Clearly, the owners wanted to walk away from the house selling the property for that price. And, the buyer was rightfully cautious asking whether or not it was a good deal and what would happen if a problem were to arise?
Benefits of a “cash for deed transaction” are cutting out all the extra services that come with closing. Closing on a property costs somewhere between two to five percent of the house price. The average closing cost would be about $3,700 if you were to purchase in the $150,000 range. You can see how a cash deed is economical if you have the money to put down.
But it does come with a cost.
What are the potential risks with cash for deed transaction?
Homes are transferred with deeds (aka titles). Titles that grant the current owner the rights to reside on the property and use the property. Titles change hands as owners buy and sell. Titles are a bit complicated, and they're supposed to be. They protect the rights of the current owner. However, issues can make a title defective. Let's take a lien as an example.
"A lien is a legal claim or a right against a property. Liens provide security, allowing a person or organization to take property or take other legal action to satisfy debts and obligations."
Mortgage lenders can usually foreclose if you are unable to pay the loan back under the terms of the note. They have the right to seize the house. Owning a home with a lien against it means that responsibility for that payment falls on you. Failure to do so dramatically impacts your credit score. The loan itself can also become a financial burden. Removing a lien requires either full payment or settling.
But, why accept these various risks involving the title to your home when these risks can be avoided?
The Benefits of Working with a Title Company
Title companies conduct services that protect you and your investment. The purchase of real estate is often one of the largest investments a person will ever make. Considering this factor, spending the extra money to hire a reputable title company to be involved is a small price to pay for security. A title search will look through community records to find information about the property. The title company gives homeowners a title report that discloses "any information about easements, restrictions, ownership, and liens on the home." Other title information includes:
- Identifying the legal owner of the property
- Liens
- Judgments
- Unpaid taxes
Having this information before you buy allows you to back out of the contract or ask the current owner to settle the disputes.
What does Title Insurance Do?
Title insurance is a safety net designed to protect your investment. It kicks in if something were ever to challenge your right to ownership. Title insurance protects you against:
- Liens
- Fraud
- Forged deeds, releases or wills
- Misinterpretations of wills
- Deeds by minors or by persons of unsound mind
- Deeds by persons supposedly single, but married
- Unpaid taxes
Title insurance covers the financial costs as the issues are rectified, including lawyer and court fees. Without it, you could potentially lose your property.
Hiring a Real Estate Attorney
Title insurance usually ensures that there are no unknown adverse title problems. The involvement of a reputable real estate attorney will often provide you with the assurance that your funds are secure and will be appropriately disbursed, that the deed is drafted correctly, and will be able to answer legal questions for you about your closing.
A real estate attorney also may add a level of formality ensuring all laws and rules governing real estate transactions (as they regularly change) are being followed, that transfer taxes and recording fees are properly collected and paid, and that all parties to the transaction are acting with the utmost good faith without undisclosed self-dealing.
Is there ever a situation where it could make sense to avoid these costs and simply pursue a more straightforward strategy? Depends on how much of your finances you are willing to gamble. It is always a good idea to get all your numbers together so you can make an informed decision.
Use our online title calculator to get an estimate on what protection will look like. For additional information, or to obtain a better idea of costs, please feel free to contact us at 615.269.7676.
