Collateral File Review

[Christopher Evans]

Hello BP Note Investors,

Recently had a bid accepted on a CFD in AL. Received the collateral files, reviewed myself for any red flags (break in chain etc) and then sent the files to the lawyer who was recommended by someone in the note world. To my surprise the lawyer wants a 30 yr search on title rather than the one owner search. I was told in AL this is the only way to get an insurable title. Also to note, it being a CFD, the lawyer seemed perplexed by the inclusion of landlord/tenant language. I was also told that because the mortgage does not contain a power of sale clause it can not go through a non-judicial FC. Am I missing something? Should we seek out other recommendations? Any advice would be greatly appreciated.

[Bob Malecki]

Well, with a Contract For Deed you are essentially taking ownership of the home and your 'borrower' is under contract to make installment payments until the end of the term, so there would be no power of sale. You already own the property.

[Christopher Evans]

Thanks Bob. Appreciate the response. I guess we will keep probing and plugging away.

[Don Konipol]

Lots of confusion as to what a 'contract or deed' actually is.

First of all, much of the specific rights associated with this type of real estate contract depend on state laws, which vary somewhat.

Secondly, the seller of the contract, i.e. property seller/lien holder, hold LEGAL title to the property. The buyer holds EQUITABLE title. What this means depends on (1) the way the actual contract is written (2) whether the CFD is recorded or not (3) the state laws in effect at the time the CFD was executed (4) the state laws in effect now and (5) in Texas, as in some other states, what percentage of the sales price has been paid.

Unless an investor is VERY familiar with the laws of a particular state, it is imperative that an experienced, knowledgeable attorney render an opinion. A number of these transactions have ended in absolute disaster for the CFD lien holder.

[Chad U.]

@Don Konipol provided an excellent summary of what a CFD is.

The main component in a CFD is the forfeiture clause which states what happens if the borrower/buyer fails to make timely payments. Typically they are written so that if the borrower does not make payments, then they are given a cure period at which point if they do not "cure the contract", then the Seller/Lender has right to immediate possession of the property. And most CFD contracts I've seen have a clause that the contract terminates and turns into a month to month tenancy upon which the borrower will be evicted under those state/county laws. Therefore, a Power of Sale clause is not required because as Don states above, you have LEGAL title to the property still.

As for the state of Alabama, the courts have stated forfeiture provisions are not favored but will be upheld when the lender-borrower has actual or constructive notice that strict compliance w/ the terms have been established.  In every case, it's very advisable to have these types of loans serviced by a reputable and licensed servicer in that state so that this can be proven.  And as far as I'm aware there are no provisions in AL wrt Equitable title rights, but best to check with proficient RE attorney in AL.  

[Christopher Evans]

Thank you @Don Konipol and @Chad U. for the response and the insight. It is starting to seem like this CFD will take down a path we do not want to travel.

[Ronald Rohde]

Great information here!