Strategy Agreement for Deed

We’re going to dive deep into one of the most powerful and misunderstood tools in a real estate investor’s arsenal: the Agreement for Deed (AFD), also known as a land contract or installment sale.

This is a strategy that can turn a “non-qualifying” buyer into a closed deal, but it’s a double-edged sword.

For the savvy investor, it offers a path to profitable, creative financing. For the unprepared, it can be a legal and financial trap.

Part 1: The Core Concept – What is an AFD?

An Agreement for Deed is a financing arrangement where the seller retains legal title to the property while the buyer takes possession and makes payments. Think of it as an installment plan for real estate.

Seller’s Role: The seller acts as the bank, collecting monthly payments (which include principal, interest, taxes, and insurance). Critically, the seller keeps the legal deed until the buyer fulfills all payment obligations.
Buyer’s Role: The buyer gets immediate possession and begins to build equitable title—the right to the property’s value and use. They are responsible for maintenance, taxes, and insurance, just like a traditional homeowner.
The Big Picture: This is a fantastic tool for a buyer who has a down payment but can’t qualify for a bank loan. It allows them to get into a home and build a track record of on-time payments.

Part 2: The Critical Deal Structure

A well-drafted AFD is your foundation. Here are the key terms you must master:

Paragraph 1 – Financials: This section locks in the deal. It specifies the purchase price, down payment, interest rate, and the fixed monthly payment. It’s also where you’ll include a balloon payment clause, which requires the buyer to pay the full remaining balance after a set period (e.g., five years). This forces a refinance, ensuring you’re not a long-term landlord.
Paragraph 2 – Possession & Protection: This clause formalizes when the buyer takes possession. For a buyer, it’s crucial to be added as an “additionally insured” on the seller’s hazard insurance policy. This protects their interest in the event of a fire or disaster.
Third-Party Servicing: For maximum protection, don’t handle the money yourself. Use a third-party servicing company to collect payments, pay the underlying mortgage, and manage the tax and insurance impound accounts. This adds a layer of professionalism and trust while ensuring the underlying loan is always paid on time.
Legal Compliance: The AFD must be recorded at the courthouse. In Florida, this is required to protect the buyer’s equitable interest (Fla. Stat. § 689.01). Recording the document provides public notice and prevents the seller from selling the property to another party.

Part 3: The Danger Zone – AFD vs. Lease Option (A Seller’s Perspective)

This is the most important lesson for any seller considering an AFD.

While it may seem simple, the AFD often comes with hidden risks that make a Lease Option a far superior choice.

	Agreement for Deed (AFD)	Lease Option
Legal Status	Considered a sale from the beginning.	A lease, with a separate option to buy.
Default & Recapture	Often requires a lengthy and expensive foreclosure process to regain the property.	The simpler legal process of eviction is often all that’s needed to reclaim the property.
Tax Implications	Seller is treated as a lender. They lose key tax benefits like depreciation and may not be eligible for a 1031 exchange.	Seller retains ownership benefits, including depreciation and 1031 exchange eligibility.
Price & Control	The purchase price is fixed. You are locked in, regardless of future market appreciation.	The price can be set for a future appraisal, giving you flexibility to capitalize on market gains.
The Verdict	AVOID this for selling. It offers the buyer too much protection and exposes the seller to too much risk and tax liability.	USE THIS. It provides the seller with far more control, tax benefits, and a faster path to reclaim the property if the deal goes south.

Part 4: The Advanced Play – The AFD for a Buyer

If you are the buyer, the AFD is a powerful tool.

It grants you the right to sublease the property without any special clauses. This allows you to function as a landlord from day one, giving you the ability to use the property for a rent-to-own arrangement with a tenant, creating a profitable spread.

For a buyer with a clear path to qualifying for a mortgage in a few years, the AFD is a powerful tool for controlling property, building equity, and getting a home without dealing with traditional bank approvals.

A seller, on the other hand, should always carefully consider if an AFD is truly in their best interest, or if a Lease Option would provide a safer, more profitable path.