Contract for Deed

[Robert Dunkle]

What is your feeling on a "Contract for Deed" property that the borrower is borrowing money to pay off the current owner/holder of the contract? Since borrower and owner of record are not the same, is this a "Purchase Transaction" that would require analyzing the contract in the "contract" section of the 1004, or is it a "Refinance Transaction" because they are paying to a "lender" of sorts?

 

[Bob Ipock]

Yes. If you can get to the truth.

Often this is a lease purchase with a portion of the lease payment (rent) going toward the principal. From my experience the sales price of a land contract, contract for deed or lease purchase will be inflated due to one or more issues. Often the buyer will have bad credit and in unable to get a loan. Just as often the seller has been unable to sell the property to a typical buyer due to location, condition or some other issue.

I have sold several pieces of property on a contract for deed...one I am still collecting payments on. I have always gotten a decent down payment, above market interest rate and had an attorney draw up the agreements. Once I got a $5,000 down payment, the guy made 2 years of payments and then defaulted. I sold it again under similar terms.

These are not usually market based transactions, typical buyers & sellers nor typical financing/terms transactions.

Lenders usually look at these pretty hard due to phony, created equity.

 

[PropertyEconomics]

If the contract is recorded it is a sale ... there may be terms which you have to analyze, but who the lender is should not be of concern .. only the terms under which the property sold.

We see Real Estate Contracts here all the time, particularly, when credit gets very tight.

Also there are other reasons these sales occur including tax consequences of the seller. In a full sale the seller has to take the income (assuming its not exempt as a personal residence) in the year in which it is earned (or the capital gain) but it can be spread out over a number of years if installments are received.

 

[Bob Ipock]

If the contract is recorded it is a sale ... there may be terms which you have to analyze, but who the lender is should not be of concern .. only the terms under which the property sold.

We see Real Estate Contracts here all the time, particularly, when credit gets very tight.

Also there are other reasons these sales occur including tax consequences of the seller. In a full sale the seller has to take the income (assuming its not exempt as a personal residence) in the year in which it is earned (or the capital gain) but it can be spread out over a number of years if installments are received.

Owner financing is not typical. Sure it happens but it is not typical. The fact that there is owner financing is a clue to investigate....just like the owner of a property being a lender often means the property has been foreclosed.


I assumed it was a sf residence (owner occupied most likely) since it was on a 1004.

 

[PropertyEconomics]

Owner financing is not typical. Sure it happens but it is not typical. The fact that there is owner financing is a clue to investigate....just like the owner of a property being a lender often means the property has been foreclosed.


I assumed it was a sf residence (owner occupied most likely) since it was on a 1004.

Single family rentals are not put on a 1004 as single family properties?

And you will kindly note I said terms need to be reviewed an analyzed .... I did not mislead in my post.

 

[Terrel L. Shields]

In my state it has to be filed to be legal. Assessment records tend to show the owner's name with buyer. I note some OK deeds likewise show both, but sometimes the C of D is not recorded.

 

[PropertyEconomics]

In my state it has to be filed to be legal. Assessment records tend to show the owner's name with buyer. I note some OK deeds likewise show both, but sometimes the C of D is not recorded.

We are seeing more memorandums of contract these days ... which would mean there is a contract but it has not been filed of record but the public is on notice it exists. Learning the terms of those contracts can be very difficult.

 

[Robert Dunkle]

My question is...... If the property is under a contract for deed and the buyer is attempting to finance the property and pay of the "owner", should this be listed on the 1004 as a Refinance or a Purchase?

I am doing a review and disagree with the way it was handled, but just wanted to get the opinion of the forum.

 

[PropertyEconomics]

My question is...... If the property is under a contract for deed and the buyer is attempting to finance the property and pay of the "owner", should this be listed on the 1004 as a Refinance or a Purchase?

I am doing a review and disagree with the way it was handled, but just wanted to get the opinion of the forum.

It is a purchase becuase the deed has never passed hands ... the contract has not been satisfied thus the "buyer" remains the buyer and is wanting to satisfy the contract.

From your position it seems like you think it is a refinance ... I would not agree with that thought.

 

[gregb]

Just for kicks:

When buyers are able to secure financing terms that are more favorable than would otherwise be available in the lending market, (9) a portion of the subject's purchase price reflects the premium paid for favorable financing terms. Consequently, adjusting the sale price for terms of financing is needed when favorable (i.e., below-market) financing arrangements are used in the purchase of real property. This adjustment allows the sale price of properties purchased with below-market financing arrangements to be compared to properties purchased at prevailing market interest rates. (10) In theory, the transaction price should equal the sum of the value of the real property and the present value of the favorable financing terms.

The size of the adjustment is traditionally computed by determining the present value of the difference in required monthly payments between the rates specified in the contract for deed and the published average market rate such as with a bank or mortgage company. This present value represents the value of advantageous financing.