Everybody Wins: The Qualified Contract For Deed Method Provides A Unique New Path To Homeownership

In 2020, homeownership in the United States tumbled to 63.1% — the lowest rate in 50 years. At the same time, the number of renters across the nation rose by 15%. Today, the percentage of renters in the U.S. is the highest the country has ever seen.

Over the past three years, rental prices have also soared to new heights, with nearly half of all renters classified as cost-burdened. This has left the majority of renters feeling as though they have little to no hope of owning a home in the future.

To overcome the major barrier to homeownership, those who are not able to qualify for a purchase mortgage from traditional lenders have typically turned to alternative methods of financing such as rent-to-own or lease-purchase agreements — processes that have been known to be at-risk for potential fraud.

In Philadelphia, however, Home Owner Makers Educational Services, or H.O.M.E.S., has introduced the Qualified Contract for Deed approach to financing that aims to be a “win-win” for both the seller/developers and the buyer. 

“The Qualified Contract for Deed, or QCD, is a newly trademarked seller financing method that simplifies the transition from renting to homeownership,” H.O.M.E.S. founder Samuel Bradstreet said. 

Bradstreet said that unlike other methods of alternative financing, a QCD provides immediate transfer of an “equitable interest” to the buyer at contract signing. The buyer gains the rights of ownership, including occupancy and potential resale profit, in exchange for monthly payments of principal and interest on the contract amount. Payments are manageable as they’re comparable to the prior rental cost, Bradstreet said.

Home Owner Makers Educational Services is a private partnership with broad expertise in law, finance, mortgage banking and real estate whose mission is to help renters achieve homeownership by using the standardized QCD elements, instead of the age-old original contract for deed process. 

Although contract for deed agreements have been around for hundreds of years, they fell out of use due to a lack of standards. H.O.M.E.S. has now modernized this approach with its QCD, he said.

Some of the standardized elements included in a QCD contract are that the agreement must always be documented in writing, as well as the details of the purchase price, term, down payment amount, interest rate used and monthly payment to be made. Bradstreet said now that H.O.M.E.S.’ QCD has guidelines to follow, any predatory practices that buyers might have experienced prior with rent-to-own or lease-purchase agreements will be essentially eliminated.

“A typical QCD has a low down payment of about 1%, compared to the 20% a traditional purchase mortgage requires,” he said. “There are no closing costs for the buyer when they sign the contract. After the minimum of 12 monthly, on-time payments, buyers can apply for a refinance mortgage which, once approved, will transfer the legal title over to the buyer.”

Multifamily building owners had been making their strategic gains based on continually rising rental prices; that worked as long as interest rates remained low. Due to economic pressures, the tides have now dramatically changed. 

Interest rates have increased 10 times over the past year, rents are cooling off and inflation has heightened operating costs — leaving many owners wondering how, or even if, they will be able to meet their debt service coverage requirements. But Bradstreet said that these building owners will also win by using QCDs.

Because a QCD acts as a mutually beneficial agreement for both the buyer and seller, multifamily owners and developers will find that converting their apartment units to condominiums may ward off debt troubles. Their building valuations rise when “owner-occupied” — thereby increasing their bottom line.

“The QCD evolved from seller contracts used in apartment-to-condominium conversions in Old City, Philadelphia, back in the 1990s,” Bradstreet said. “A local real estate firm, Historic Landmarks for Living, used an early QCD version to sell three full buildings — the Wire Works, Bridgeview Place and The Colonnade — to current tenants, then to the public. Buyers made low down payments of $500, kept their monthly outlay comparable to their rent, and instantly became equitable owners of their units while getting the tax advantages of ownership.”

After the conversion from apartments to condominiums, the buildings’ net investment cash flows doubled once all the units were sold. By converting to condominiums and offering a QCD financing option, owners/developers can attract a wider range of potential buyers who may not qualify for typical mortgages, he said. There is also no need for Fannie Mae and Freddie Mac approvals.

“Sellers and developers benefit from using QCDs by receiving consistent monthly contract payments, reducing the risks associated with traditional rental arrangements,” Bradstreet said. “Depending on the current rental levels and tax benefits to buyers, many apartment buildings will achieve a doubling of value as condominiums instead of rentals, as was seen with The Colonnade, Bridgeview Place and the Wire Works.” 

Realtors in Philadelphia are becoming certified to use QCDs through H.O.M.E.S.’s e-learning courses, demonstrating their commitment to giving renters this chance at first-time homeownership. Legal partners to the process include Rocket Lawyer and Legal Shield, offering low-cost services for buyers and sellers. 

“Lenders today are much more understanding and willing to work with their clients and their borrowers, and a QCD is a way for them to all win,” Bradstreet said. “If the lender happens to be an end loan mortgage provider, then they can not only recover the full amount of the apartment mortgage, but they can then participate in the refinancing of the QCD buyer’s contract. Since a QCD benefits every party in the real estate transaction, we’re excited to see how many renters, sellers and developers take advantage of this innovative new financing process.”

This article was produced in collaboration between the Home Owner Makers Educational Services and Studio B. Bisnow news staff was not involved in the production of this content.

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