Real Estate Contracts vs. Deeds of Trust
I often received calls from folks looking to buy or sell a house that is finance by the seller. The foremost question I get is: What is the difference between a deed of trust and a real estate contract? Well, here’s how I explain it:
Real Estate Contracts
A real estate contract is simply an agreement between the buyer and seller for the purchase of a piece of real estate. The document should be recorded but does not have to be. Typically, the buyer pays a down payment and makes principal and interest payments for a period of time to pay off the balance.
When the balance is paid off the property is deeded from the Seller to the Buyer. This is an important aspect to understand regarding a real estate contract. The Seller will typically own the property until the Buyer completely pays it off. The Buyer has rights to possess the property and the Seller cannot transfer the property to someone else or otherwise encumber it, but the Buyer does not get the deed until it is paid off. The Buyer will typically also be responsible for the utilities, taxes and maintenance on the property.
Another important aspect to understand is that if the Buyer defaults on the agreement by not making payments, the Seller will usually have the right to keep the property and the payments made to date. Unlike a typically mortgage where the Bank forecloses and sells the property and gives the owner the remainder, the Seller in a real estate contract will get to keep the benefit of all the payments made and the property. So if you are a Buyer, make sure you don’t default!
Deed of Trust
A Deed of Trust is the same document you would execute when financing a home with a bank. First, you would sign a promissory note. This promissory note would outline the payment terms, principal balance, interest rate, payment due date, etc. This promissory note would contain a personal guarantee that you would repay the loan.
Executing a promissory note alone would be unsecured debt, and thus fairly risky, so the note is accompanied by a Deed of Trust. A Deed of Trust secures the Promissory Note to the property purchases. A Deed of Trust must be recorded to do this. That way, if the Buyer defaults and has no funds to pay off the balances, the Seller can foreclose on the home.
Unlike a real estate contract, the Buyer usually has title to the property. The Seller cannot simply evict the Buyer and take back the property, the Seller must go through a lengthy foreclosure process. After the Seller sells the home at the foreclosure auction, the Seller can keep the funds up to the amount owed on the note (plus interest and fees) but must return an surplus to the Buyer.
Legal Disclaimer: The information on this page does not constitute legal advice and should not be relied upon as each situation is fact specific and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and documents at issue. The information on this page is solely for the purpose of legal education and is intended to only provide general information about the matters stated therein. The information on this page should not be used as a substitute for competent legal advice from a licensed attorney that practices in the subject area of the matters stated therein. No attorney-client relationship is formed without an actual agreement confirmed in writing. I am licensed only in Washington and Oregon.