An Arizona contract for deed is a seller-financed real estate arrangement in which the buyer takes possession of the property and makes payments directly to the seller, while the seller keeps legal title as security until the full purchase price is paid. Arizona Revised Statutes sections 33-741 through 33-748 set the rules: how defaults are cured, how forfeiture works, and what each side owes the other along the way.1Arizona Legislature. Arizona Code 33-741 – Definitions The structure helps buyers who can’t qualify for a traditional mortgage, but it carries risks a standard home purchase doesn’t.
How the Arrangement Works
The statute defines a contract for deed as any agreement in which the seller transfers equitable title to a buyer while retaining legal title as security until the price is paid.1Arizona Legislature. Arizona Code 33-741 – Definitions The definition is deliberately broad. It covers agreements labeled contracts for deed, contracts to convey, agreements for sale, and similar arrangements. What matters is the structure, not the name on the document.
Equitable title gives the buyer the right to occupy the property, improve it, and eventually receive full ownership. Legal title stays with the seller and functions like collateral. The seller can’t sell the property out from under a paying buyer, but the deed doesn’t change hands until the last dollar is paid. At that point the seller delivers what the statute calls a “payoff deed,” transferring whatever title the seller still holds.1Arizona Legislature. Arizona Code 33-741 – Definitions
One boundary worth noting: these statutes do not govern ordinary purchase contracts, escrow instructions, or the paperwork used to move a traditional sale through closing.1Arizona Legislature. Arizona Code 33-741 – Definitions Those are separate arrangements under other law.
What the Buyer Actually Owes
“Monies due under the contract” is a broader category than most buyers assume, and this is where defaults often begin. The amount owed includes the regular principal and interest payments to the seller, payments the seller makes on existing liens that form part of the purchase price, delinquent property taxes the seller covered, and any insurance premiums the seller had to pay after the buyer let coverage lapse.1Arizona Legislature. Arizona Code 33-741 – Definitions
A buyer can be current on the monthly payment and still be in default. If property taxes go unpaid and the seller steps in to cover them, that becomes part of what the buyer owes. Same with insurance. Falling behind on those reimbursements counts as a payment default just as much as missing an installment.
Cure Periods If a Buyer Falls Behind
Arizona gives the buyer a grace period to catch up before the seller can begin forfeiture. The length depends on how much of the purchase price has already been paid:
- Less than 20% paid: 30 days
- 20% to less than 30% paid: 60 days
- 30% to less than 50% paid: 120 days
- 50% or more paid: 9 months2Arizona Legislature. Arizona Code 33-742 – Forfeiture of Interest of Purchaser in Default Under Contract
Only certain payments count toward that percentage: down payments to the seller, principal payments to the seller, and principal payments on existing liens that form part of the purchase price.2Arizona Legislature. Arizona Code 33-742 – Forfeiture of Interest of Purchaser in Default Under Contract Interest does not count. A buyer who has been paying for years but whose payments went mostly toward interest may qualify for a shorter cure period than the calendar suggests.
If the contract has a “time is of the essence” clause, the seller can only waive it by accepting less than the full amount due. Being slow to enforce the contract doesn’t count as waiver. If the seller has waived the clause, they can reinstate it by giving the buyer at least 20 days’ written notice demanding strict performance going forward.2Arizona Legislature. Arizona Code 33-742 – Forfeiture of Interest of Purchaser in Default Under Contract
How Forfeiture Works
Once the cure period expires without payment, the seller can move toward forfeiture, but the process has formal steps. Missing one can invalidate the whole thing.
The seller (and the account servicing agent, if one exists) records a notice of election to forfeit with the county recorder in the county where the property sits. The notice is only effective if recorded after the cure period has already expired. Record it early and it’s a nullity.3Arizona Legislature. Arizona Code 33-743 – Notice of Election to Forfeit and Reinstatement of Purchasers Interest
Next, the seller serves a copy on the buyer and on anyone with a recorded interest or lien subordinate to the seller’s, at least 20 days before the effective date of the forfeiture. Service can be personal or by first-class mail to the last known address on file. Missing someone who should have been served doesn’t kill the forfeiture; it just delays it until that party gets proper notice.3Arizona Legislature. Arizona Code 33-743 – Notice of Election to Forfeit and Reinstatement of Purchasers Interest
The notice must identify the contract, describe the property, state the amount needed to cure, and set a deadline. The buyer can stop the forfeiture any time before that deadline by paying the amounts listed.3Arizona Legislature. Arizona Code 33-743 – Notice of Election to Forfeit and Reinstatement of Purchasers Interest
After the deadline passes without payment, the seller still has to go to court. Under ARS 33-744 the seller files an action in superior court to declare the buyer’s interest forfeited and quiet title in the seller’s name. The suit has to name the buyer and everyone who held a subordinate interest as of the forfeiture deadline.4Arizona Legislature. Arizona Code 33-744 – Completion of Forfeiture by Action to Quiet Title Changing the locks is not enough. Without a court order, the forfeiture isn’t legally complete.
When the Seller Must Foreclose Instead
Forfeiture isn’t always available. Two situations force the seller into foreclosure, which follows the same rules as foreclosing a mortgage.
If the buyer breaches the contract for reasons other than failing to pay money owed (letting the property deteriorate, violating a use restriction, or similar), the seller cannot use forfeiture at all. Foreclosure is the only remedy.2Arizona Legislature. Arizona Code 33-742 – Forfeiture of Interest of Purchaser in Default Under Contract
If the contract lets the seller accelerate the full remaining balance after a missed payment and the seller chooses to accelerate, they must foreclose rather than forfeit. Acceleration can happen at any point after a missed payment, even before the cure period runs, but choosing it locks the seller into foreclosure.2Arizona Legislature. Arizona Code 33-742 – Forfeiture of Interest of Purchaser in Default Under Contract
Foreclosure under ARS 33-748 uses the same procedure as foreclosing a mortgage on real property.5Arizona Legislature. Arizona Code 33-748 – Sellers Right to Foreclose It is slower and more expensive for the seller than forfeiture, and more protective of the buyer because a court oversees it and the buyer may recover equity. That trade-off has real strategic weight on both sides.
The Due-on-Sale Trap
If the seller still has a mortgage on the property, a contract for deed can set off a serious problem. Most residential mortgages contain a due-on-sale clause letting the lender demand immediate full repayment if the borrower transfers an interest in the property. Federal law explicitly permits lenders to enforce these clauses, preempting any state law to the contrary.6Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions
Federal law carves out exceptions for transfers to a spouse or child, transfers on the borrower’s death, and transfers into a living trust in which the borrower remains a beneficiary, among others.6Office of the Law Revision Counsel. 12 USC 1701j-3 – Preemption of Due-on-Sale Prohibitions A contract for deed to an unrelated buyer is not among them. If the lender learns of the arrangement and enforces the clause, the seller has to pay off the mortgage in full or face foreclosure on the underlying loan, regardless of whether the buyer’s payments are current.
Lenders often detect these transfers through changes to deed and title records, different names on payment accounts, or new policyholders on insurance. A buyer entering one of these deals should ask whether the seller has an existing mortgage and whether the lender has been notified. A seller who waves off the question is a signal worth taking seriously.
Using an Account Servicing Agent
Arizona law provides for an account servicing agent, a neutral third party appointed jointly by buyer and seller to collect payments, distribute them under the contract, keep records, and typically hold the payoff deed for eventual delivery. Eligible agents are limited to a defined list that includes banks, trust companies, escrow agents, licensed real estate brokers, and Arizona-licensed attorneys, among others.1Arizona Legislature. Arizona Code 33-741 – Definitions
The cost is modest compared with what a neutral payment record is worth if the relationship deteriorates. Without an agent, disputes about how much has been paid and what’s still owed tend to become he-said-she-said, and they surface at the worst possible time.
Recording and Requesting Notice
Recording the contract with the county recorder protects the buyer’s equitable interest against third-party claims. An unrecorded contract leaves the buyer exposed if the seller tries to resell the property or if a judgment creditor places a lien on it. Nothing in the statute mandates recording, but skipping it is one of the most common and avoidable mistakes buyers make.
Anyone with an interest in the property can also record a written request under ARS 33-746 asking to be served with any future notice of election to forfeit. Recording that request does not create or imply any interest in the property; it simply guarantees the 20-day notice if forfeiture begins.7Arizona Legislature. Arizona Code 33-746 – Request for Copy of Notice of Election to Forfeit This matters most for subordinate lienholders, such as a contractor who worked on the property or a lender who financed improvements for the buyer.
Tax Treatment for the Seller
The IRS treats a contract for deed as an installment sale. The seller does not report the full gain in the year of the contract. Instead, a portion of each payment is reported as income across the life of the agreement using Form 6252, with each payment split into return of basis, capital gain, and interest income.8Internal Revenue Service. About Form 6252, Installment Sale Income IRS Publication 537 lays out the mechanics.9Internal Revenue Service. Publication 537, Installment Sales
Two traps deserve attention. If the contract charges less interest than the IRS’s applicable federal rate, the IRS may recharacterize part of each payment as unstated interest, changing how much of each payment is taxed and at what rate. And if the buyer defaults and the seller reclaims the property through forfeiture, the seller may need to recognize gain or loss on the disposition of the installment obligation. A seller can elect out of installment reporting and recognize the full gain upfront, but the window to elect is limited and the choice is difficult to reverse. Sales to related parties bring extra reporting requirements and resale restrictions.9Internal Revenue Service. Publication 537, Installment Sales
Before Signing
Arizona’s statutes set a floor. The contract itself governs the interest rate, payment schedule, responsibility for repairs, insurance requirements, and what happens if either party dies during the contract term. An attorney review before signing is cheaper than litigating those terms later.
A seller with existing financing should think hard about the due-on-sale risk before signing anything. That risk persists even if the buyer pays on time, and the seller stays on the hook for mortgage payments throughout any forfeiture or foreclosure needed to reclaim the property. A buyer should insist on recording the contract, using a qualified account servicing agent, and getting a straight answer about any mortgage the seller still owes.