Things to notice when buying a CFD

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Things to notice when buying a CFD

Michael Vaughn
NE · Member since 2019 · 23 posts · 3 votes

I was recently sent a tape of only CFD loans and I am trying to understand the difference between that and a regular mortgage.

From what i understand the difference between a CFD and a regular mortgage are (correct me if I am wrong) Are:

  • If the borrower defaults it does not matter how much money he paid so far, he loses the house
  • It is more easier to take possession of the house in a process called forfeiture (unless a certain amount of time has passed in some states, then a normal foreclosure is still needed)
  • Usually these houses will be in worse shape, worse neighborhoods then it would have been was it a normal mortgages since the people who take these loans could not have taken a normal mortgage, hence they are not doing well financially 

Are there any special things to look for during the due diligence phase of buying a CFD that are not done with a regular mortgage?

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
7y

@Michael Vaughn

Those assumptions are not always true. There are many states where a land contract is treated like a mortgage and must be foreclosed upon.

You should make sure you thoroughly understand state laws prior to buying a CFD.

CFD's are also much higher risk than notes since you are on title, if there are county violations they typically go against your company and if you own other property in the county the lien can be placed in ALL your properties.

I could go on for months on CFD's including the good and the bad. Very rarely does it end where you are getting a property back with a ton of equity in it

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Michael Vaughn

    a contract for deed is a real property transfer in which legal title does not pass from the seller to the buyer; the buyer receives equitable title to the property. The contract usually calls for a down payment (but doesn’t have to), and future payments to be made, and for legal title to be passed once a certain amount of payments made, which can be all payments. Various state have enacted various laws with the intent of protected purchasers in contract for deed situations by trying to rectify some of the most objectionable abuses.

    Since a formal foreclosure is not necessary in case of default, the process by which a seller/lender can foreclose is simpler, less costly and quicker. The debtor still has the ability to use the courts, including bankruptcy court, so the above benefits may be relative, not absolute.

    Contracts for Deed , like owner financing, is used when either (1) the borrower can not qualify for conventional financing or (2) the property doesn’t qualify for conventional financing , or (3) the sale needs to take place quicker than a conventional loan can be put in place, or (4) the parties want to keep the current mortgage note in place, or (5) the seller wants to obtain a higher yield on some of his equity capital.

    Historically, contracts for deed were often times used for low end properties and buyers with no ability to obtain financing.

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  • Dan DeppenBusiness Member
    Erie, CO · Member since 2017 · 274 posts · 267 votes
    7y

    Always check with an attorney in the state the CFD is to make sure you understand any state-specific rules for CFDs. In some cases you must foreclose and can't do a forfeiture.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Don Konipol:

    @Michael Vaughn

    a contract for deed is a real property transfer in which legal title does not pass from the seller to the buyer; the buyer receives equitable title to the property. The contract usually calls for a down payment (but doesn’t have to), and future payments to be made, and for legal title to be passed once a certain amount of payments made, which can be all payments. Various state have enacted various laws with the intent of protected purchasers in contract for deed situations by trying to rectify some of the most objectionable abuses.

    Since a formal foreclosure is not necessary in case of default, the process by which a seller/lender can foreclose is simpler, less costly and quicker. The debtor still has the ability to use the courts, including bankruptcy court, so the above benefits may be relative, not absolute.

    Contracts for Deed , like owner financing, is used when either (1) the borrower can not qualify for conventional financing or (2) the property doesn’t qualify for conventional financing , or (3) the sale needs to take place quicker than a conventional loan can be put in place, or (4) the parties want to keep the current mortgage note in place, or (5) the seller wants to obtain a higher yield on some of his equity capital.

    Historically, contracts for deed were often times used for low end properties and buyers with no ability to obtain financing.

    my question as a buyer of a CFD since title has not transferred from the original seller to the new borrower.. what happens if the original seller gets into financial trouble and a lien is put on his assets IE the property.. to answer my own question I suppose that lien is junior and the buyer of the property would have some remedy to cure or wipe it out.. and I guess the holder of the CFD would then have to do a foreclosure to clear title ??? is that correct ?

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Jay Hinrichs, the contract for deed needs to be recorded.   Then liens against the property or legal owner after the recording are inferior.  If not recorded then they are superior and theoretically  dealt with within the contract.  Which is one reason that many ended up as nightmares for the buyer.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Don Konipol:

    @Jay Hinrichs, the contract for deed needs to be recorded.   Then liens against the property or legal owner after the recording are inferior.  If not recorded then they are superior and theoretically  dealt with within the contract.  Which is one reason that many ended up as nightmares for the buyer.

    And I suppose to the buyer of the CFD as well as they would need full blown foreclosure to wipe out juniors.. which keeps cash for keys or DIL not possible.. that was always my worry.. in the Land and Timber business it was very common to do CFD as the buyer I was always worried about putting up significant money for something I was not in title to..

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    7y

    @Michael Vaughn

    Those assumptions are not always true. There are many states where a land contract is treated like a mortgage and must be foreclosed upon.

    You should make sure you thoroughly understand state laws prior to buying a CFD.

    CFD's are also much higher risk than notes since you are on title, if there are county violations they typically go against your company and if you own other property in the county the lien can be placed in ALL your properties.

    I could go on for months on CFD's including the good and the bad. Very rarely does it end where you are getting a property back with a ton of equity in it

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  • Logan Hassinger
    Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
    7y

    @Jay Hinrichs

    In your scenario of a seller selling his CFD, then Title is assigned to the buyer. Therefore the original seller has no ties to the property nor holds title and a lien can't be placed on the property.

    Now if you’re saying that in the middle of the sell, the seller gets in to financial trouble and a lien then clouds the title before the sale can happen, then this would take a senior position. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Logan Hassinger:

    @Jay Hinrichs

    In your scenario of a seller selling his CFD, then Title is assigned to the buyer. Therefore the original seller has no ties to the property nor holds title and a lien can't be placed on the property.

    Now if you’re saying that in the middle of the sell, the seller gets in to financial trouble and a lien then clouds the title before the sale can happen, then this would take a senior position. 

    to clarify.

    CFD in my understanding is a Seller of the property takes back a CFD but retains ownership of the property does not transfer to the payor on the CFD.. you the investor buy the contract for deed.. Title remains in the original sellers name you as investor now own the CFD just like getting a mortgage or DT assigned to you.. The original seller of the property prior to being fully paid off and transferring the ownership to the buyer of the property gets a judgement.. it now clouds title.. So not sure what the buyer of the property has to do to clear the title. and I understand the buyer of the CFD records it and is senior at that time.. But would then have to go through the process of a formal foreclosure.

    Now are you saying when you Buy a CFD that you also take title to the property so two documents.. one transfer of ownership of the asset and assignment of the CFD ?? You being the investor.. the buyer of the property is just paying on a Contract .. ?

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  • Bryan HartlenPro Member
    Investor · Phoenix, AZ · Member since 2018 · 316 posts · 159 votes
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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Bryan Hartlen:

    Ok so as an investor buying a CFD you not only get the CFD assigned to you.. but the owner of the property and beneficiary of the CFD also transfers ( sells the property to you).. I wonder how that looks tax wise for the seller. I guess at that point they have cashed out..

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  • Michael Vaughn
    OP
    NE · Member since 2019 · 23 posts · 3 votes
    7y
    Originally posted by @Chris Seveney:

    @Michael Vaughn

    Those assumptions are not always true. There are many states where a land contract is treated like a mortgage and must be foreclosed upon.

    You should make sure you thoroughly understand state laws prior to buying a CFD.

    CFD's are also much higher risk than notes since you are on title, if there are county violations they typically go against your company and if you own other property in the county the lien can be placed in ALL your properties.

    I could go on for months on CFD's including the good and the bad. Very rarely does it end where you are getting a property back with a ton of equity in it

    Ok, I understand that sometimes I will need to foreclose, thank you for that.

    Regarding the liens, that sounds like a serious issue. If there are no such liens when I buy the property, what kind of liens can be added later? Is there something in the contract of the CFD that gives me some power over the borrower, in case he creates a cause for such a lien?

    Does all of these mean you stay away from CFD's?

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  • Logan Hassinger
    Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
    7y

    @Jay Hinrichs

    You got it Jay. As the buyer of the CFD, I receive two documents; Assignment of Note and a Quit Claim Deed.

    As for the exit for the seller, yes, they have effectively cashed out and hopefully sold the CFD for more than their acquisition costs plus any holding costs.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Logan Hassinger:

    @Jay Hinrichs

    You got it Jay. As the buyer of the CFD, I receive two documents; Assignment of Note and a Quit Claim Deed.

    As for the exit for the seller, yes, they have effectively cashed out and hopefully sold the CFD for more than their acquisition costs plus any holding costs.

     so the end user buyer only needs to worry about you getting some judgement against you  :)  or tied up in some fund that maybe has some issues..  

    but got it thanks.. 

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    7y

    @Michael Vaughn

    Also their could be some liens which are not recorded. You also may have to detail with utility bills. I know of many people who got burnt bad in Detroit as there was a small tax bill but $10k in sewer fees never paid. You can try and go after the borrower but you will never get it back.

    CFD's are not for the faint of heart and some do really well, some ok and you will have some where you lose out.

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  • Michael Vaughn
    OP
    NE · Member since 2019 · 23 posts · 3 votes
    7y
    Originally posted by @Chris Seveney:

    @Michael Vaughn

    Also their could be some liens which are not recorded. You also may have to detail with utility bills. I know of many people who got burnt bad in Detroit as there was a small tax bill but $10k in sewer fees never paid. You can try and go after the borrower but you will never get it back.

    CFD's are not for the faint of heart and some do really well, some ok and you will have some where you lose out.

     I see. Thanks for the information, will take that into consideration.

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  • Phil Z.
    California · Member since 2012 · 7 posts · 0 votes
    6y

    Just reading through this thread, and have a follow up question. So it is stated above that the buyer of a CFD receives two documents: Assignment of Note and a Quit Claim Deed. Assuming the borrower pays off the CFD a few years down the road, what would be the type of deed which the CFＤ holder can transfer to the borrower? Imagine the borrower would need a General Warranty Deed, how would the CFD holder provide that as he had received a Quit Claim Deed when he acquired the asset and the contract？

    Sorry if this is a newbie question and that I am missing something obvious.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    6y

    @Phil Z.

    It is usually in the contract for deed language on what the borrower is to receive. Some may be a qcd, special warranty or general warranty,

    If it’s a general warranty when you are buying that cfd you better make sure to get a full blown title search and make sure it’s clean, otherwise you could pay dearly later on.

    I see CFD's with huge liens on them which they lien is from the cfd holder for not paying fines or taxes on other properties in that jurisdiction which stick to all properties. I wouldn't want to be involved in those as when the cfd borrower pays it off and realizes there is a $100k lien on property that was not his fault it will get ugly

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  • Phil Z.
    California · Member since 2012 · 7 posts · 0 votes
    6y

    I agree, Chris. which is what prompted my question: why it seems to be the norm to transfer/assign a CFD with the seller of CFD executing a quitclaim deed?

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