Besides filing a Memorandum of Agreement, how does a contract buyer protect contract seller from mortgaging the property. And if they do, who is first in line?

[Kent Renshaw]

Scenario: Contract buyer and seller enter into a Contract for Deed. Buyer immediately files Memo of Agreement in the situs county. All goes well for two years and Seller applies for loan. Mortgage Lender realizes the existence of Contract for Deed, but enters into agreement with Seller anyway.

Buyer satisfies payment and demands Deed, Seller refuses. Buyer sues on State Court, Seller files bankruptcy and forfeits house to bankruptcy court. Both Buyer and Lender are named creditors. Realizing that property is encumbered that there is nothing left for other creditors, bankruptcy trustee abandoned the house and surrenders to state court to settle issues.

Seller believes she should still have interest in the house. Buyer has paid in full the contract price and did all she could do by filing Memo of Agreement.

Mortgage Lender feels they are entitled to the house because of their Mortgage with the house as security.

My argument: Buyer has supreme right to property as to both the Seller and the Mortgage Lender. As to the buyer, the contract has been satisfied. As to the Mortgage Lender because Buyer has done all in her power to protect her interest whereas the Mortgage Lender had control of his situation and proceeded on with the loan with what they thought was a "secured interest." As both the Contract for Deed and the Mortgage are Contracts with the Seller, it would seem that neither would have power over the other except for the time of execution and filing. Lender had the chance to "walk away" but instead went on with the deal placing themselves at peril. I would think that equity would put Buyer's Contract first in line and as such, Buyer has a superior interest of total possession of the home and no surplus for Lender to claim.

Your thoughts?

[Account Closed]

And the simple answer to your question: No CFDs. The Buyer should have executed a promissory note in favor of the seller secured by a mortgage instrument. I have yet to see the benefit to a buyer in a CFD situation. Installment sales without deeded ownership are old world thinking that often involves a subtle form of oppression. The lease/option and CFDs I see in my areas are all about the seller expecting and planning for failure on the part of the buyer. The CFD and L/O is used to create ease for the seller to get the property back without foreclosure. The situation presented here is more common that I think most people know.