Selling a house on contract means you act as the bank. The buyer makes a down payment directly to you and pays you monthly installments over a set period of years. You keep the title to the property until the contract is paid in full. The buyer gets possession and the obligation to maintain the property. If the buyer stops paying, you keep the down payment, you keep the payments already made, and you take the house back.
This arrangement is called a contract for deed, a land contract, or an installment sale depending on the state. It is the most common form of seller financing. It allows you to sell a house to a buyer who cannot qualify for a bank loan, or to sell a house that a bank will not lend on. It also exposes you to risks that a traditional sale does not. Here is how it works, how to structure it legally, and when it is worth the risk.
How Selling on Contract Works
In a traditional sale, the buyer gets a mortgage from a bank. The bank pays you the full purchase price at closing. You transfer the deed to the buyer. Your involvement with the property ends. In a contract sale, there is no bank. The buyer pays you a down payment, typically 5 to 20 percent of the purchase price, and signs a contract agreeing to pay you the remaining balance in monthly installments over a term of years, typically 5 to 15 years, with a balloon payment at the end. You keep the deed in your name until the contract is satisfied.
The buyer gets equitable title, which is the right to possess and use the property, and the obligation to pay property taxes, insurance, and maintenance. You retain legal title, which is the actual ownership recorded at the county. When the buyer makes the final payment, you transfer the deed. If the buyer defaults, you go through a forfeiture or foreclosure process to reclaim possession, depending on your state’s laws.
This is not a lease. It is not a rent-to-own arrangement where the buyer has an option to purchase. It is a sale. The buyer is contractually obligated to buy the property. The only thing standing between the buyer and full ownership is time and payments. The buyer builds equity with every payment. If the buyer defaults, they lose that equity, which is a harsh outcome that state laws regulate carefully.
Advantages of Selling on Contract
Wider pool of buyers. You can sell to buyers who cannot qualify for a traditional mortgage. This includes self-employed buyers with strong income but limited tax documentation, buyers recovering from a past foreclosure or bankruptcy, buyers with a recent job change, and buyers who need a smaller loan than banks are willing to originate. These buyers can afford the payments but cannot pass a bank’s underwriting. Selling on contract turns that buyer from someone who cannot buy your house into someone who can.
Higher sale price. Buyers who need seller financing will typically pay a premium for it. A house that would sell for $250,000 in a traditional sale might sell for $265,000 to $275,000 on contract because the buyer is paying for the financing convenience and the opportunity to buy a home they could not otherwise purchase. The premium compensates you for the risk and the delayed receipt of the full purchase price.
Steady income stream. Instead of receiving a lump sum at closing, you receive monthly payments of principal and interest for the term of the contract. The interest rate on a contract sale is typically 6 to 10 percent, higher than bank mortgage rates, reflecting the higher risk. The interest income is taxable as ordinary income. The principal portion is a return of your basis in the property and is taxed as a capital gain in the year received if you qualify for installment sale treatment under IRS rules.
Sell a house that banks will not lend on. Houses with significant repair issues, unpermitted additions, or other conditions that make them ineligible for conventional financing can be sold on contract. The buyer accepts the property as-is. There is no bank appraisal, no lender-required repairs, and no underwriting conditions. The contract governs the terms of the sale, not a bank’s lending guidelines.
The Risks You Accept as the Seller
Buyer default. The buyer stops making payments. You must go through a legal process to reclaim the property. In most states, this is a forfeiture process that takes 60 to 180 days, not the faster eviction process used for tenants. During the forfeiture period, the buyer remains in the property, may not be maintaining it, and may be hostile. The legal process costs $2,000 to $5,000 in attorney fees. You recover the property, but you have lost months of payments and paid legal fees.
The due-on-sale clause. If you have a mortgage on the property, your mortgage almost certainly contains a due-on-sale clause. This clause allows your lender to demand full repayment of your loan if you transfer any interest in the property, including through a contract for deed. Selling on contract while you still have a mortgage triggers the due-on-sale clause. The lender may not discover the sale, but if they do, they can call the loan due in full. You must either pay off the existing mortgage before selling on contract, obtain the lender’s written consent, which is rarely granted, or accept the risk that the lender will enforce the due-on-sale clause. Selling on contract with an existing mortgage is the single largest legal risk in this type of transaction.
Property damage. The buyer occupies the property and is responsible for maintenance, but you still own it. If the buyer neglects the property, fails to maintain it, or actively damages it, you may recover a property worth less than when you sold it. The contract should require the buyer to maintain insurance naming you as an additional insured, and you should verify the insurance is in force annually.
Tax complications. An installment sale spreads your capital gain over the years you receive payments, which can be an advantage or a disadvantage depending on your tax situation. The interest income is taxable. If you reclaim the property through forfeiture after receiving payments, the tax treatment of the forfeiture is complex. You must recapture depreciation, calculate gain or loss on the repossession, and potentially amend prior year tax returns. An accountant familiar with installment sales and repossessions should handle the tax filings.
How to Structure a Contract Sale Legally
Hire a real estate attorney. This is not a transaction you can handle with a standard purchase agreement and a title company. The contract must comply with your state’s specific laws governing contract for deed transactions. Some states require the contract to be recorded with the county. Some require specific disclosures to the buyer. Some require foreclosure rather than forfeiture to reclaim the property after default. An attorney who practices real estate law in your state drafts the contract and advises you on the legal requirements.
The contract must specify the purchase price, the down payment amount, the interest rate, the monthly payment amount, the term of the contract in years, the balloon payment date and amount if applicable, the buyer’s responsibilities for property taxes and insurance, the seller’s remedies upon default, the conditions under which the buyer can prepay the balance without penalty, and the requirement that the buyer maintain the property in its current condition. Every term is negotiable. The contract is a private agreement between you and the buyer. It is not subject to bank lending regulations, which is both its advantage and its risk.
Use a title company or an attorney to handle the closing. The title company conducts a title search to confirm you have clear title. The buyer signs the contract, a promissory note, and any state-required disclosures. The contract is recorded with the county to provide public notice of the buyer’s equitable interest. The buyer pays the down payment. You retain the deed. The transaction is recorded but the ownership has not transferred.
Use a loan servicing company to collect payments. A third-party servicer accepts the buyer’s monthly payments, sends statements, manages the escrow for taxes and insurance, and sends you a monthly report and payment. The servicer costs $20 to $40 per month and removes you from the direct payment relationship with the buyer, which is worth the fee. A buyer who is late on a payment is more likely to respond to a professional servicer’s notice than to a personal phone call from the seller.
Contract Sale vs. Rent-to-Own vs. Lease Option
A contract for deed is a sale. The buyer is obligated to purchase. A rent-to-own or lease option is a lease with an option to purchase. The tenant has the right but not the obligation to buy. The difference matters when the buyer defaults. Under a contract for deed, the buyer has equitable title and must be removed through forfeiture or foreclosure. Under a lease option, the tenant has no ownership interest and can be evicted like any other tenant, which is a faster and cheaper process. Lease options are lower risk for the seller but provide less commitment from the buyer. Choose the structure that matches your risk tolerance and the buyer’s financial strength.
Frequently Asked Questions
Can I sell on contract if I still have a mortgage?
Legally, no. Your existing mortgage almost certainly contains a due-on-sale clause that allows the lender to call the loan due if you transfer any interest in the property. Selling on contract triggers this clause. You can sell on contract if you own the property free and clear, if you obtain a written waiver from your lender, which is rare, or if you pay off the existing mortgage before or at the contract closing. Some sellers proceed with a contract sale despite the due-on-sale clause, accepting the risk that the lender will not discover the sale or will choose not to enforce the clause. This is a calculated risk, not a legal strategy, and it can result in the lender demanding full repayment of your mortgage on short notice.
What happens at the end of a contract sale with a balloon payment?
Most contract sales include a balloon payment. The buyer makes monthly payments for 5 to 10 years based on a longer amortization schedule, then owes the remaining balance as a lump sum at the end of the term. The buyer is expected to refinance with a traditional lender at that point. By then, the buyer should have built equity, improved their credit, and established a payment history that qualifies them for a conventional mortgage. If the buyer cannot refinance, the balloon payment is due and payable. If the buyer cannot pay, they are in default, and you proceed with forfeiture or foreclosure.
Are contract for deed sales legal in every state?
Yes, but the rules vary significantly. Some states, including Texas and Florida, have detailed statutes governing contract for deed transactions. Others rely on case law. Some states treat a contract for deed default as a foreclosure requiring court proceedings. Others allow a non-judicial forfeiture process. Some states give the defaulting buyer a right to cure the default and reinstate the contract. You must work with an attorney licensed in the state where the property is located. A contract that complies with one state’s laws may be unenforceable in another.
Last modified: June 14, 2026
