Skip Recording CFD's?

Question

Hi All,

I have a question that I'm sure will make me sound reckless to some of you experienced note investors. Here goes: I've just purchased my fifth contract-for-deed (CFD) and I'm now on a timeline where I save up and buy a new CFD every three months. Eventually I hope to cash flow where I'm making larger outright note purchases, but for now at my price point, smaller CFD's (around $15k UPB) are what I can afford.

Given that these are CFD's, I'm noticing that recording costs are a little heftier than just recording an assignment of mortgage. The transfer fees/taxes for the deed can get into the $400 - $500 range for each of these. So my question is: if I wanted to save on the recording costs, keep the deed for my records, proactively pay taxes as they're billed (would coordinate with the company I buy the CFD from), then work with the borrower to get the deed recorded under their name once they've paid off the contract--am I putting myself at risk? These contracts run from 3 - 5 years; is there a downside to skipping recording until deed is ready to go to the borrower, as long as I'm staying on top of taxes?

I look forward to hearing from the pros on this--thanks!

Chris Seveney · Answer

@Brittany P.

1. Read your loan sale agreement. When we sell a contract for deed the buyer is obligated to record the deed to get it out of our name.

2. You may not be able to insure the property.

3. If the borrower defaults recording takes time so you would lose that time

4. Any fines or violations you may not get notified of or if the seller to you somehow put leverage on it or the borrower

Brittany P. · Answer

Yup, good points. We've been purchasing from land flippers, so some of those wouldn't be concerns for these particular transactions, but definitely as we move up in the note investing world and start purchasing notes for actual houses, all that makes sense.

Alex Booth · Answer

Each state can be a little different. However, it's usually best practice to record the deed but do not record the note itself (or contract in this case). The wet signed physical piece of paper is the actual collateral for this deal.

You could probably be fine simply keeping the deed in the seller's name for a short while. However, like others have mentioned, you will be in major trouble if the seller goes through a divorce, files for bankruptcy, or notices that you haven't recorded the deed and try to sell the property again.

Don't be penny wise and pound foolish.

Peter Walther · Answer

You're very welcome.

Brittany P. · Answer

Much thanks to you and @Jay Hinrichs. You raise some great considerations here.

Peter Walther · Answer

As Jay pointed out, if you don't record the deed, as far as the world at large is concerned, your seller still owns the property. If (s)he has a judgment filed against them, it will probably have priority over your unrecorded interest. If your seller files bankruptcy, the Trustee will probably seek to have your interest subordinated or invalidated. What do you do if your house burns down or is destroyed in a storm, and you can't produce the deed? What do you do if your seller decides his sale to you was so profitable (s)he just sells it again since your deed isn't of record? If the 2nd buyer records his/her deed you're probably out of luck, particularly if they got a title insurance policy.

Brittany P. · Answer

We don’t mind the recording process—at the very least it’s a tax write off—but let me throw a few more angles out there that I hadn’t mentioned before and see what you and @Chris Seveney think: the CFD's we're purchasing are for unimproved land parcels, so I don't think there's an obligation to insure. Additionally, the contract requires that the deed be recorded in the borrower's name once the contract is paid in full, but it's silent as to whether we have to record when we purchase the seller's interest in the contract. Finally, in the event of default, as we work through the grace period we could get the deed recorded in our name before we sought a new buyer (if we couldn't get the current buyer back on track).

Obviously I’m getting the sense no one here’s a fan of skipping recording, I’m just wondering if these additional aspects change the calculus for you at all.

Skip Recording CFD's?

Skip Recording CFD's?

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