Contract for deed

[Richard Carlsen]

Not sure on the fee portion transferring totally- that would depend upon the state law and they vary. But since the seller generally remains on title I do not see how full fee has transferred.

Brad

Please name one thing that a land contract buyer normally (not withstanding any special L/C provisions of course) cannot do with his property that an owner who holds title can.
You have to ask: Can he possess it? Put an addition on it? Cut the grass? Sell it? Rent it? Have it pass on in his estate to his heirs? the answers are generally yes.

I cannot think of one thing that a L/C buyer cannot do to a property that an HO holding title to a property can do. However, the most important thing is that the property is inheritable. That's what makes it fee simple. Almost no HO has control of the complete bundle of rights to a property but as long as the title is not entailed, the estate should be considered fee simple.

 

[Pat Butler]

I've bought many properties on a contract basis here in Illinois. First off, it's generally a state issue as to what interest the buyer and seller each have. The checkboxes on the Fannie forms are totally inadequate to handle this simply by checking one box.

In Illinois the contract purchaser's interest is known as 'equitable title'. It's sort of a middle ground in that the buyer has certain ownership rights, yet those rights can be limited by what's in their contract.

For example, when I've sold on contract I've limited the buyer's ability to further encumber the property with any liens whatsoever (without my approval) as well as limited their right to make structural improvements to the property in excess of $5,000 without my approval. Those are pretty typical convenants by the way. So certainly the buyer does not have the same rights as fee simple.

If the contract purchaser defaults, then a foreclosure proceeding must be initiated. These foreclosure proceedings are the same as for a buyer who has full fee simple ownership of the property.

As to whether or not it's a refi versus a purchase, that's an excellent question, and frankly, is up to the lender. I'll tell you what I've done though- I've drafted a sales contract to buy out the land contract. The 'sales price' is nothing more than the unpaid balance on the land contract. That forces the situation into a purchase. I did just that when a lender wanted to view one of my buyouts as a refinance. I wanted to get some cash out of the transaction and the LTV on a refi was much lower than that of a purchase. The twist was that my land contract had an option in it. So by excercising my option to purchase, it was indeed a legitimate sale. Nothing more than a very delayed sale at terms that were agreed to years previously.

On one house that I bought for a very low price I was concerned that my low buyout amount of the contract would result in a low appraisal. So by drafting a sales contract closer to market value I had less concern that an incompentent appraiser would be influenced by the numbers.

 

[Don Clark]

Brad

Please name one thing that a land contract buyer normally (not withstanding any special L/C provisions of course) cannot do with his property that an owner who holds title can.
You have to ask: Can he possess it? Put an addition on it? Cut the grass? Sell it? Rent it? Have it pass on in his estate to his heirs? the answers are generally yes.

I cannot think of one thing that a L/C buyer cannot do to a property that an HO holding title to a property can do. However, the most important thing is that the property is inheritable. That's what makes it fee simple. Almost no HO has control of the complete bundle of rights to a property but as long as the title is not entailed, the estate should be considered fee simple.

Richard,

While I agree with most of your points, it is a state issue. In Virginia Land Contracts or contracts for deed have to have a third party such as an attorney hold a signed deed in escrow until satisfaction of the contract at which time title passes. If it goes into default, the title in escrow reverts back to the seller. IMNSHO I believe I would call the land contract owner the owner with full detailed explaination and add the statement, already in the 1004 that as an appraiser i am not responsible for matters of a legal nature. It is a mortgage related transaction and the new 1004 can be used.

 

[Richard Carlsen]

For example, when I've sold on contract I've limited the buyer's ability to further encumber the property with any liens whatsoever (without my approval) as well as limited their right to make structural improvements to the property in excess of $5,000 without my approval. Those are pretty typical covenants by the way. So certainly the buyer does not have the same rights as fee simple.

In Virginia Land Contracts or contracts for deed have to have a third party such as an attorney hold a signed deed in escrow until satisfaction of the contract at which time title passes

These are either contractual specifics or state requirements to ensure that when the contract is paid off, title will pass. These have nothing to do with the fee simple which is defined as an inheritable interest in a propery. If the HO dies, the property does not automatically revert to the deed holder. It stays in the HO's estate as well as any equity in the property. Ergo, it is fee simple. If it were to be required to revert to the deed holder or some other 3rd party, it is entailed.

For appraisal purposes and for possessory purposes, a land contract buyer is the owner of the real estate. FNMA forms are totally adequate.

 

[Pat Butler]

Fee simple is more than just an inheritable interest; it's also one in which title is vested at the present time. And is typically (depending on which definition you choose) only subject to police powers.

With equitable title there is no guarantee that title will eventually pass to the buyer unless that buyer, and seller, comply with terms of the land contract. In effect, you have multiple parties with interests in said property and their interests (especially the buyer) are not fully realized unless everyone acts according to the contract. With fee simple, the owner owns it RIGHT NOW with no "ifs".

The problem is with terms being used such as 'owner.' We're talking about different interests in real estate and someone with equitable title does not have the same interests as someone who owns a property in fee simple. Whether or not you want to call someone with an equitable interest an 'owner' I guess is irrelevant. But someone with an equitable interest has much less interest in a property that someone who owns it in fee simple.

There's much more risk involved being a contract purchaser and anyone who buys on contract will tell you that they certainly don't feel like they have a fee simple interest until everything gets paid off. Incidently, in Illinois the deed doesn't get recorded until the land contract is finally paid off. Then, the buyer will have a fee simple interest.

The only thing recorded (not even necessary) at the recorder's office is usually just a memorandum of contract that is recorded to protect everyone's interests and encumber the title. Rarely are the actually terms of the land contract, or the land contract itself, actually recorded.

 

[Stephen J. Vertin MAI]

Not good as a comp though.

Why?

but try to enforce one if one of the parties dies and witnesses are unavailable- not fun

In order for a contract for deed to be legal it must being in writing. I believe this true in all states. Some people also call these land for deed contracts. Why would you need witnesses?

From all I have seen over these decades, they remain pretty much different from most other sales- hence my admonition to avoid them as comps. My experience with them is that they tend to be higher than most other sales (this has not been my complete experience) and, with the advent of so much sub prime lending, are vastly reduced in number (very interesting observation).

But since the seller generally remains on title I do not see how full fee has transferred.

So what all sorts of deeds are held by trust companies until the loan is paid. Do you consider these full fee transferred?

Brad:

Are you limiting your decision to single family homes? Many of these contracts exist in rural area for large land tracks and others in depressed commercial markets. Do you just blow off the sale if you hear "contract for deed"? A contract for deed, in most cases, is simply a financing arrangement. What does it matter if the buyer is paying the owner directly or the bank? There are owners out there who think a 6 to 8 percent return is not bad.

 

[xm72mhd]

The guy who said that a contract for deed is not a tranfer of the fee is correct. It is a contract to transfer the fee after contract is completed.

So what all sorts of deeds are held by trust companies until the loan is paid. Do you consider these full fee transferred?

I have no idea. Can you tell us? What are they doing, holding the deed on a condition subsequent such as payment? If so, there hasn't been a transfer of the fee. There may be some equitable ownership floating around through all of this, but the fee it aint.

 

[Richard Carlsen]

Fee simple is more than just an inheritable interest; it's also one in which title is vested at the present time.

Title is not mentioned in the fee simple definition. Fee simple estate is commonly defined as: The greatest interest that one can have in real property which is unqualified, of indefinite duration, freely transferable and inheritable. Fee simple estate is now also known as fee simple. We are not talking about allodial title which is free of every and all restrictions including government such as taxes, zoning, deed and building restrictions, etc.

You will note that the ownership interest is unqualified, ongoing, transferable and inheritable. Nowhere does it say that the party must be the deed holder. If the ownership position is such that they can have, hold and occupy the property forever, can sell it or give it away and the property remains within the estate, then for all practical purposes, it has met the definition of fee simple.

 

[Pat Butler]

Equitable title is typically far from an unqualified interest. There are usually all sorts of restrictions in the contract as to what the buyer's right are, including not being able to further encumber the property with more financing. How can this sort of an interest be the 'greatest interest' that one could have in real estate? It's not even close. Heck, in ILL the conrtract seller's name is still on all the documents except for the contract-for-deed itself.

 

[xm72mhd]

Nowhere does it say that the party must be the deed holder. If the ownership position is such that they can have, hold and occupy the property forever, can sell it or give it away and the property remains within the estate, then for all practical purposes, it has met the definition of fee simple.

What????

Please distinguish between evidence of ownership (title) and a deed. I cannot envision a circumstance where what you enumerate as fee simple ownership does not include recorded evidence, and that document is called a deed. Now a lease may also include a lot of it, except for the right to dispose of the supporting fee.