Anyone used a Contract for Deed?

Each state's laws may vary but generally a contract for deed is very favorable to the "seller".  Very generally, it would allow the seller to take possession of the property without having to foreclose if the buyer defaults for any reason (fails to pay, fails to keep it insured, uses the property as a meth production center, etc).  Title does not pass to the buyer until all payments have been made.  Some states may require a foreclosure if there is substantial equity in the property. 

From a federal tax perspective, renting it may be better in the short run because if you "flip" it immediately, the gain on the installment sale (by contract for deed) may be short term sale in your facts given and would be subject to ordinary income rates versus capital gains rates (if held for a year).  Rent it for a year then sell it and can write off some of the expenses that dont have to be capitalized and can take some depreciation.  Then after a year, can get capital gain rate when sold.   In any case, you are correct, consult your attorney or accountant to determine the best decision based on your state and personal financial needs.  Good luck.

Hey Climbinggonzo

I am a real estate attorney in the Kansas City area, so always need to check with someone local in MN.  The biggest restriction with a Contract for Deed, is that the "seller" in the transaction needs to own the property free and clear (no mortgage on the property).  While a lender may let a borrower get away with leasing a property, a Contract for Deed is a very different structured transaction. 

In a Contract for Deed, you are transferring equitable title to the property, and only retaining legal title until the final installment payment under the Contract. The IRS considers a Contract for Deed to be a sale at the time the contract is entered into, as opposed to when the final payment made and title is transferred.  If the borrower were to default, unlike a lease, where you could evict the tenant through a relatively straight-forward court process, under a Contract for Deed you are essentially having to foreclose on your own property in order to recapture that equitable ownership that was transferred.  In addition, most tax advantages of owning property are lost in a Contract for Deed, as those are possessed by the buyer - again, unlike a lease where you the landlord would have various tax deductions available for the investment property. 

Back to the free and clear point, I have seen several lenders call a mortgage in default under the "due on sale" clause for the borrower transferring an interest in the property via the Contract for Deed to a third party that the lender does not have any formal relationship with. 

Again, Contract for Deeds have historically been used in the past on rural and farm properties and while there are typically no State statutes that limit them to those situations, they sometimes don't fit the normal financing circumstances found in suburbs ... etc.  I typcially recommend persons consider a lease/purchase in a situation like this as it better protects you the property owner in the event the tenant is unable to fufill their obligations.  One thing to keep in mind is that normally only about 20 to maybe 30 percent of these type of deals result in an actual closed sale, so I would structure the transaction in the fashion that allows you get control back over the property the easiest and most affordable if you are in that 70 percent at the end of the day.

I hope this helps.  Good luck.