Selling Contract for Deed vs Selling Note

[Chris C.]

Theoretical deal:
3/2 in South Carolina
I purchase this property, rehab, and resale with contract for Deed. Buyer puts down 5k and sign contract for deed of 65k. Comps support value of 70k. Nice working class neighborhood etc.

What is the interest for note buyers or others to buy this property. (I know the purchase would be at some discount to the remaining balance of the contract.)

Contract buyer would be actually buying home and assuming my position in the contract for deed. I see numerous benefits to this but also buyer would be closing on entire home and not just the note.

I would like to do contract for deed as opposed to straight owner financing so that I can refinance after the rehab to pull my money out to move on to next project but would also like the option to sell the contract to pull my profit after it is seasoned.

What are opinions on this and what are viable ways to accomplish this.

[Bill Gulley]

Hi well, with a properly structured Contract For Deed and settlement you execute a Warranty Deed to convey title to the buyer and that is held in escrow, it is not filed at that time. The Buyer executes a quit claim deed to be used in the event of default and that deed is also mheld in escrow. So when you seel the CFD, the Warranty Deed basically goes with the assignment to the Holder in Due Course.

A note is note a security instrument it is only evidence of the debt created, it can bve secured or unsecured. The Mortgage Agreement or Deed of Trust is the security instrument that goes with the note to secure the collateral insterest in the property. When secured notes are sold, the assignment to the new Holder includes the security agreements/instruments.

You seel me a property on a CFD. It's an obligation for you to deliver title in the future subject to me paying an amount as agreed. You execute a warranty deed and I execute a QC Deed. Both deeds are held in escrow, in other words, with some neutral party with instructions to file the deeds upon evidence of certain events as may be required. In most states, the owner of a property can not place a lien on their owned property (I don't knpow of any in fact) but what is filed is a notice of the CFD, a notice of the owner's interest being encumbered to the extent that the party in title can not further encumber the title to the property.

When the CFD is sold, the underlying obligation is assigned with all rights, title, and interest in and to the contract, including the requirements to deliver the deeds as agreed to the buyer upon the buyer meeting their obligations. The QC deed made by the buyer at settlement can also be assigned to the new CFD holder, just as if I wrote you a check and you did not cash it, but endorsed the check to Bryan. Bryan can the cash the check I wrote to you.

I think what might make the assignment process clear is to see the Assignment Agreement and the endorsements to a CFD sale. While the buyer of a CFD never has to take title to the property, he stands in the place of the seller, in his stead, to perform all the agreements made under the contract.
If the new CFD holder must secure the property in lieu of foreclosure (which is what the QC deed was made as...a deed in lieu of foreclosure) the assignment of the QC Deed is filed together with the QC Deed and title is then vested in the name of the new CFD owner.

While state law and local custom may vary, this is basically the the transaction.

Accounting for the acquisition of the property under the deed in lieu of foreclosure is at the value paid for the contract for deed to that new contract holder, however, for taxes, it is the value of the note or obligation as if it had been paid in full. So the difference between the contract purchase price and the face amount of the note or CFD, the discount, is profit and is recognized as a gain. Taking the property with a quict claim deed is a deed in lieu of foreclosure, accepting the property instead of the full amounts outstanding in cash, so there is no deficiency amount with a CFD. The same would hold true with a note made from an equity amount, but notes created arising from the advance of cash can have a deficiency due from the borrower.

Bryan, after a property is sold on an installment agreement, the seller may not encumber the property further in any way and would be responsible to the buyer for any lien created by him. So, a refinance can not be done, however if the buyer agrees and allows the seller to refi, it is possible. Generally, a conventional lender will not finance a property with an outstanding installment sale, without the buyer's obligation on the note as well, but a hard money lender/private lender might do that. Doing so without disclosing the sale can be seen as mortgage fraud.

Hope that helps. See your attorney before you enter into such contracts! Good luck.