CFD Seller missing borrower's DL or proof of title insurance - is this a red flag?

Question

In contract to purchase a CFD in MO. Have done most due diligence items, but I'm stuck on two pieces that I'm not sure about.

1. The seller doesn't have the borrower's driver license or any identity verification paperwork. They also haven't kept records of the original origination documents as far as I can tell. The borrower has been paying on time and the CFD purchase price to property value is <50% at this point. I should still wait for the DL or passport, right?

2. The seller doesn't have copies of their title insurance policy binder. All they've provided is the title insurance commitment. I should wait for proof of a title insurance policy, right? The only reason I'm hesitant to move forward without this info is that the seller is an inactive corporation - if they dissolve and there are issues with their warranty deed then I don't want to have to pay a lawyer to go after the GP of the defunct partnership to make me whole.

Peter Walther · Answer

Just to be clear, whether the seller has a title policy or not is irrelevant since it can't be assigned to you.  You need to either have the seller pay to have one issued to you or pay for it yourself.  I suggest you close this sale at a title company rather than at the kitchen table, they'll see to the proper preparation of the docs and their recording.  They'll also confirm there aren't any other liens or encumbrances on the property that need to be disposed of pre-closing.    I'd tell them about the CFD and expect it to appear as an exception on the policy but even if you don't, there's an exclusion in the policy for matters you know about that the company doesn't.  I'd get an estopple letter from the contract purchaser to confirm how much has been given to your seller.  If you get a copy of the seller's deed from the public records and it was prepared and recorded by a title company, their file number is probably on it, most likely in the upper left-hand corner.  I hope this helps.

Ned Carey · Answer

@Varun Hegde the guys who answered you will know MUCh better than me but I am lost and wouldn't touch this (I am not a note buyer)

If I understand you are essentially getting an assignment of the rights to collect the payments, like buyiing a note. How can you give the buyer a warranty deed unless you get one from the person selling you the CFD. If you are not in recorded title how can you give a warranty deed?

It does matter if the seller has title insurance becasue you already know this is a defunct company.

It is possible they may not be able to leaglly see you the CFD if the business is not in good standing.

If a title company can't find their file by an address that would scare me.

Like @Chris Seveney said, I would not worry about a drivers license, that is what a notary and title insurance are for.  That is the leaset of your worries.  Of course like I said I am not in the note space Chris and @Jamie Bateman will have better answers but the things I mentioned jump out at me.

Varun Hegde · Answer

Ok great, seems like my concern over borrower's driver license is unnecessary but concern over the title policy is warranted. I'll update the thread on what we settle on. Thank you for your help!

Marco Bario · Answer

@Varun Hegde - This is a good topic.

Often a title policy is issued to "XYZ Entity or Individual(s) and/or it's assigns" – however unless the title company handling my closing can perform a date down from when the existing title policy is ordered and issue an update in my name, I purchase a new policy at closing and factor the cost into my offer price.

It differs between note buyers, but I always close through title and always make sure there's a lenders (Deed of Trust/Mortgage) or owners (Contract) policy in my name. I ask title to provide any documents that will be recorded and I won't authorize release of funds until I have proof of recording. The questions you raise would be addressed by closing through title and obtaining title coverage.

Jamie Bateman · Answer

You should receive an assignment for the land contract itself. Sometimes there can be an allonge with a CFD but not always. You definitely want to be sure the seller executes an assigment of land contract (CFD). You won't record the assignment since the contract is not recorded. As @Chris Seveney is indicating, I would absolutely attempt to obtain a copy of the existing title policy or have them provide a new one, if possible.

Chris Seveney · Answer

@Varun Hegde

If you have to give title policy at payoff I would absolutely have the seller provide one to you at sale

What if there was something that was not picked up in the past that causes you to  it be able to transfer clean title. You could be on the hook for a lot of money.

Varun Hegde · Answer

I’ll be receiving a warranty deed from the seller. I’ll also be assigned the contract for deed via an allonge. This means that as long as the sellers’ title is vested correctly then I should be clear to deliver a warranty deed when the borrower completes their end of the CFD agreement.

@Chris Seveney do you think I should make sure there’s a valid title policy (i.e. that the commitment was fulfilled?)

Varun Hegde · Answer

Got it. The CFD is not recorded. I have the original CFD doc though so not concerned about the recording status. I have priced the cost of the warranty deed into the purchase price as well. Title company is presumably not aware of the CFD as it's not recorded.

I'm not sure if seller is providing a title insurance policy, but I guess if they do then it doesn't matter if they have title insurance?

Chris Seveney · Answer

Few other questions:

Is the CFD recorded? If so, then not having the original not a big deal. Even if they do not have the original, having a copy should suffice.

Providing a warranty deed then you will want to get title insurance. Also when you transfer it to that borrower, make sure in your price you include the cost it is going to cost you to give that borrower a title policy.

If you buy it, are they giving you a new title policy, as title to the property is being transferred. Is the title company aware of the CFD?

Drivers license I would not care about at all.

CFD Seller missing borrower's DL or proof of title insurance - is this a red flag?

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