Contract for Deed or warranty deed.

[Ivan Reyes]

When selling a rehab with owner financing do you normally give a contract for deed or warranty deed. Isn't a contract for deed basically a lease option contract in some states? I'm in AL.

Seems like I would give the deed if selling with owner financing??

[Bill Gulley]

Hi, a CFD, Laese/Option and Seller Financing with a DOT are three distinctly different animals. The Seller Financed deal is an installment contract that conveys title and may also be done by a special warranty deed where the seller does not fully warrant title, or even by a quit claim deed, conveying only that interest the seller may hold in and to a property. Closing requirements for compliance with federal, state and tax laws must be complied with regardless of how title is transferred. Title is transferred.

A Lease/Option does not convey title, but an equitable interest in and to the property as a lease hold interest under the terms of the lease. The option agreement conveys an equitable and contingent interest to the extent of the option price paid. Most options do not finance a portion of the sale price and therefore do not establish equity as an installment agreement. Option prices can be financed over ther term but if the option is not taken to purchase, the option price is generally forfieted.

A Contract-For-Deed or Land Contract is an installment contract that provides for the transfer of title after contract performance. While the CFD does not convey title it does convey an equitable ownership interest and allows for the sale price to be fully paid, usually at anytime over it's term. It conveys an ownership interest as much as conveyance of title by contract terms for the use of the property, encumbrances, modifications of improvements, taxes and insurance as made by contractual agreement. State law and local custom may dictate buyers property rights and usually closely in line with those accepted under a promissory note and deed of trust, with the main difference being actions under default. For the note a non-judical or judicial foreclosure is required, for the CFD, a quit-claim deed is customarily held (in escrow supposedly) to be filed under an event of defualt.

The CFD and Lease/Option are the favorite stratigies used by scoundrels to sell properties. The terms are designed so that sufficient equity is not established or sufficient time is not allowed to cure credit issues of the borrower ensuring that contractual terms is an impossibility or highly improbable to perform. A down payment is taken and the agreement runs for some time until the seller declares default, takes the property and repeats the process.

During the Whitewater issue (I was a bank examiner in Arkansas for examinations) the issue was the equitable interest transferred in property held as collateral by banks and investors. A main concern for investors in a CFD is the due on sale clause which was established to restrict a new buyer from assuming underlying financing at below market interest rates, not becuase of collateral interests transferred. This misconception of the due on sale clause continues by investors and bankers alike today.

As Frank pointed out, Texas has strict guidelines concerning installment contracts. Preditory lending practices may be used against any investor in any state if the seller meets the definition as a dealer under UCC and various federal statutes.
In many states, charging a fee to provide an installment contract in addition to the sale price financed may well be construed as practicing law and as a mortgage origination, especially in a business name acting as a dealer. The fact that the seller is a party to the contract is sufficient for drafting any agreement, but charging for services to another party may bring about new issues for the seller, especially in the event of default. Installment contracts were and are popular amoung farmers and those selling small business operations as well. Investors picked up on these strategies and are common, however if an investor does this in the normal course of business they may well be viewed as a dealer under federal statute and may trigger issues under the Uniform Commercial Code.

There are many servicing issues with these contracts. A check can simply be held by the seller to establish a late payment history since payments are deemed to have been made upon the cancellation of the check and not the date the check was written.

The CFD and Lease/Option are excellent tools to make deals happen, especially for those marginal buyers who can not meet conventional financing requirements. They must be entered into with caution and with expertise for underwriting the deal so that the buyer has a reasonable chance to perform.

Time must be given to allow a buyer to cure any credit problems that exist and future financing will be viewed depending on the equity established in relation to an appraised value not necessarily the agreed sale price after one year. Loan servicing is necessary to provide the buyer with a credit payment history as it is actuall paid. If a third party servicer is not available, payments should be deposited into the seller's bank account for immediate clearance as proof as payment.

Another important issue is that hazard insurance may be obtained by a buyer under an installment agreement as a homeowner and a loss payee provision can be made to the seller and for any underlying financing. A Lease/Option will require a Tenants Policy for the "Optionee" and would require assignments of any loss payable to the "Optionor" since an ownership equity is not deemed to have been established under such contracts.

Additionally, the Note and Deed of Trust guards against contingent liabilities of both parties. An IRS lien may be filed against a property held in title by the seller making conveyance of title an impossibility. Bankruptcy by either party, unless such provisions are adequately addressed in the agreement are also an issue. And, there is the possibility of defualt under any existing loan by the seller that can easily jeopardize these transactions.

The degree of ownership transferred, the equitable interest in and to the property and contingent liabilities are all issues when deciding which kind of instalment transaction should be utilized.

Hope this helps to address some of the questions concerning seller financed transactions. Bill .