Where can I purchase non performing contract for deeds?

Question

Recently, I have heard more talk of people investing in contracts for deeds that are non performing.  I haven't seen these type of notes offered on the traditional platforms and I was wondering who sells these type of notes?

Jerry W. · Answer

Contracts for deed vary a LOT from state to state.  Basically the owner retains title and enters into a contract to sale and the buyer lives in the property.  If the buyer defaults a notice is usually sent and the if the Buyer does not comply the owner simply declares it over and takes the property back.  It really favors the seller/owner heavily.  The only advantage to the buyer is that there can be no deficient judgement as they have not signed a promise to pay.  The big problem is the CFD was being used to avoid the statutory redemption periods and foreclosure requirements.  As a result some states passed laws that limited them.  When the contracts started acting more like mortgages then courts started nullifying some and treated them like mortgages reforming the terms.  Usually CFDs have a escrow holder involved who as a 3rd party holds the deed from seller to buyers and a quitclaim deed from buyers to seller.  There is often a notice put of record in the courthouse notifying the public of the pending deal to make sure the owner does not go take a mortgage out on it.  In the past the escrow agent would look at the papers and give them back to the Seller if he proved that the buyer had defaulted.  in my area if the seller will not a consent to return the documents to the seller the escrow company files an interpleader with the court so they have NO liability and cannot be sued by an unhappy buyer.  End result it may takes as long as a foreclosure or even longer.  Be very careful of CFDs.  You may not get bonafide purchaser in good faith status just because you did not set up the original predatory lending deal.  Those have been previously struck down in consumer transactions where they had become commonplace to avoid things like warranties and fair dealing.

Dion DePaoli · Answer

Sandy,

The primary thing to understand is these are not "notes". The contract is an installment contract it is not a promissory note. So these instruments do not operate like traditional mortgages or deeds of trust. Therein lies the confusion for many.

We have purchased them before, so I am not advocating to fully avoid them. What I have advocated is that many do not understand what they are getting into and that causes trouble. Many newbies have tried to treat these like traditional notes. I have even seen some of the popular gurus treat them like notes. As I said above they are NOT notes.

The Purchaser (Vendee), a.k.a. buyer, holds possession of the real property with an equitable interest in title. The Seller (Vendor) retains legal interest in title and is obligated to the conveyance terms within the contract. Once full payment has been made along with any other conditions within the contract the Vendor (Seller) must deliver a deed to the Vendee (Buyer) which formally conveys the property once and for all. Until such time, the Vendor (Seller) is the owner of the real property.

As @Wayne Snell stated, specific requirements and regulations on these vary by state. That includes what type of deed must be used - some states require a Vendor to deliver a Warranty Deed. States vary on how default must be treated with varying degrees of the Vendee earning a right of redemption over time or immediately upon execution.

The issues we have seen with these is they have not been made correctly in structure or they are not being enforced correctly. We have seen sales where the instrument is treated like a note and the Seller and Buyer of the instrument attempt to simply assign the CFD/LC and fail to actually convey a deed between each other. In order for the transaction to be take place properly, well, in the spirit of what is likely sought, the Seller of the instrument must sell the real property to the Buyer of the instrument with a Deed conveyance like any other piece of real property and also deliver an assignment of the CDF/LC. Simply assigning the CFD and not delivering the deed would leave title vested in the Seller of the instruments name and would prevent the Buyer from performing per contract terms upon payment and contract satisfaction.

Additionally we often see these instruments used in a very predatory manner. There are some firms that attempt to use these instruments as way of circumventing predatory lending enforcement which include inflated property values, selling properties which no longer carry a certificate of occupancy or are in pretty bad shape, high cost interest, lack of underwriting for ability to repay and circumvention of rights of redemption through eviction instead of a process more like foreclosure. Another honorable mention in predatory practices is using CFD/LC to have a borrower with a conventional mortgage or deed of trust surrender their property and enter into this type of contract as loss mitigation strategy on a delinquent or defaulted loan - I would just stay away from that all together.

That is not to say they are ALL bad but our stance is they seem to often be abused and the abuse so far has not been reigned in but it is coming. Thanks to many of these Vendee (Purchasers) who have been taken advantage of complaining in local headlines and to their state AG's, we have seen some legal actions starting to come forward going after these abusers. That legal liability and/or the chance of the transaction being void and all sums required to be delivered back to the Vendee with damages is a real risk buyers of these instruments should be afraid of.

I would be leary of the contract for deed/land contract non-performing market place. A seller with a bunch of NP-CFD's laying around is probably not a good counter-party. Unlike the majority of whole loan mortgage and deed of trust note transactions the counterparty risk in these instruments can be quite large. A private buyer in a true note transaction buying a loan which was originated by Countrywide and held by institutional parties until being sold down to the street is generally not at the same level of CP risk. Again, that doesn't mean they are all bad but in brutally honest opinion, I don't think private street level buyers have the skill to really flush out the risks on these. So Caveat Emptor.

Wayne Snell · Answer

Hi @Sandy Uhlmann We buy them often from the institutional investors often for our portfolio for the following reasons:

1) They are typically lower cost (and lower value)  assets, allowing us to buy more of them with our capital

2)  We have seen a larger percentage (60%!) of our contract for deed/land contracts re-perform as compared with traditional first position mortgages.  Most of the borrowers who defaulted are willing to work with you to stay in their home.  Honestly they don't have a lot of other options except going and renting but that's usually a more expensive solution.  Private message me if you'd like to know how we do that.

3)  For those contracts that do not reperform we can typically (not always – there are legal exceptions) evict them instead of having to go through a full foreclosure. This varies by state and jurisdiction and we use  experienced, licensed real estate attorneys to handle it either way.

4)  We also originate CFDs when we sell houses versus a traditional sale or even owner financing.  There are some states, like where I live here in Texas for example, where you cannot legally do them.  Others, such as Ohio, we write them all day long. We use attorneys to ensure we comply with all the regulations and laws, and have thrm drafted so that they are sellable in the future (if we want to do that). Our goal is to provide quality affordable housing to people who have shown a successful history of paying rent for 3, 5 even 10  years but for some reason cannot secure traditional financing. We secure a nice down payment and make the monthly PITI payment less than or equal to what they were previously paying for rent. The lion share of people are good, hard-working families, and perform excellent in this scenario.

Call me if you'd like to talk about it further.

Jay Hinrichs · Answer

@Jerry W. could not vote for you twice.. GREAT POST  once a nifty type of transaction gets abused.. then you get the guru's involved and OH man.. LOL

Sandy Uhlmann · Answer

I didn't realize that these existed until I heard Wayne Snell being interviewed on a NoteMBA podcast.  Here is the link in case you would like to listen to the interview:

NoteMBA podcast: http://www.notemba.com/replacing-a-six-figure-income-with-real-estate-investing/

I started my note journey by investing  in seconds.  From listening to Wayne's interview and checking out the cross country tour that he referenced in the interview, it was clear to me that these CIDs had a couple of things in common with seconds:  The price point tends to be lower so you can spread your risk among multiple assest vs one, and very often you are able to exit through the borrower and keep the borrowers in their homes.  Unlike seconds, it seems that they are in first position if I am understanding correctly.  This certainly has advantages.

@Bob Malecki, Thank you for the great links you provided.  A lot of bad press about these large funds that sold these homes to buyers that were ill equipped to handle the repairs and problems associated with these lower priced assets.  It seems to me that these "toxic" assets are better in the hands of investors who can take a hands on approach to these homeowners/assets.

Please forgive my rose-colored glasses but I really like the idea of helping a struggling borrower stay in their home.  It was heart warming to hear from one of his borrowers who said she was praying for someone to help her stay in her house that had been in the family for generations.  She said she was so thankful for having someone that would work with her. I am going to include the link because I was so moved by this lady:

https://www.facebook.com/wayne.snell.7/videos/10209789055185193/

It is a shame that testimonials like this never gets any press.

Clearly, there is a lot of abuse and even fraud potential out there with CFDs.   I can see where they are a different animal vs notes.  It does seem like this may provide an opportunity to work with these borrowers that may have been victims of the hedge funds that sold them the homes "as is".  Unlike large hedge funds that are not equipped to work with borrowers, individual investors purchasing these CFDs are better equipped to modify the loan or do whatever it takes to keep the borrower in their home. I realize that these are lower value properties but everyone needs housing.

I need a lot more education with regard to CFDs.  @Wayne Snell Perhaps you can update us with your experience with these as time goes on?  I would love more education on the pitfalls, risks and benefits of CFDs.

Bob Malecki · Answer

Good summary @Dion DePaoli, realize @Sandy Uhlmann that as I understand it you are essentially the owner of the property until the Vendee pays off the contract and as such may be exposed to the liabilities associated with home ownership. This is why we do not buy CFDs in our fund as we do not want to expose our fund members (investors) to that potential liability. Also, there have been some bad press about large funds buying up vacant REOs then selling them on CFD to buyers "as is" and the buyers, being somewhat naive and underfunded, can't get the home renovated as expected and/or stop performing on the contract and face eviction. Not a pretty picture at all.

I prefer to do a conventional mortgage/DOT when we sell a property with owner financing to avoid the potential issues with CFDs.

Bob

Jay Hinrichs · Answer

these are owner carry type transactions.. there is mixed messages on these as they relate to being a safe instrument to buy..

I personally have not done any of these as a seller.. but I just was in one here in Oregon were the buyer was in default.. and I ended up with the property.. ( 3 lots in Lake Oswego )

the person living there and buying it is not on title .. when we paid off title was transfered by the bene of the contract for deed..  unlike if you buy a note you just buy the note and if you pay off you get a reconvenyance deed or what other satisfaction deed is done in a particular state.. this one we paid off and got a warranty deed.

@Dion DePaoli  I think Dion has some specific reasons why he does not buy these or recommend them. maybe we can get him to chime in..

the only reason i was able to buy the one I got is because we door knocked it.. just happened to be a contract for deed situation.

and when I was talking to the Bene of the contract of deed  ( local PDX RE attorney ) he informed me in Oregon you can do a strict foreclosure that is not handled like a judicial or DT foreclosure.. however in this instance he had started a judicial because there were many code violation liens and other liens against the current owner that needed to get wiped off..

A tad complicated but we got it done... in essence the person in possession Assigned their interest in the contract for deed to me.. then I requested and got a payoff from the bene and then they deeded it to me..  this was done on the recommendation of my title company.. I simply asked them what process do I need so I can get title insurance... the person in possession would not come to title to sign.. so the only thing I could get was this assignment ( which I had a mobile notary show up so we had a notarized sig) .. I closed without title insurance.. ( but I had run a prelim on it) then I bought title insurance after the fact..   like i said have not really dealt with this scenario before but it was fun and challenging.. the people in possession are extreme hoarders and the house is destroyed I bought it just so I could build some nice 800 to 900k spec homes on the 3 lots.

Bob Malecki · Answer

Great input here folks, thanks to all for these perspectives.

Jay Hinrichs · Answer

@Kevin Moen  about 10 years.. I would have to look at the prelim I got to see if it was recorded or not.

Kevin Moen · Answer

@Jay Hinrichs I am curious, with that prickly deal you mention above with credit issues leading to a lien on title, was the CFD recorded? How long had the borrowers been in the property?

Where can I purchase non performing contract for deeds?

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