Contract for Deed

[AnonApprsr]

It's tough but I think it's a refinance. If it was the original transaction for the contract for deed, as in the original "purchase" than that's obviously a purchase. This seems like a refinance, but I've never dealt with one. I wouldn't fault the OA for noting it as a refinance, I would probably do the same.

 

[Robert Dunkle]

My present home was purchased with CFD terms. When I went to pay off the seller I wanted to pull some money out of the transaction, so the seller and I drew up a sales contract with a purchase price that equalled the loan balance on our contract. The lender then considered our transaction to be a sale and had better terms than a refinance.

If I had chosen to just pay off the seller as a lien holder then the lender would have treated it as a refinance because a lien was being paid off.

So how did a contract for purchase at the loan balance get you any "cash out" when, typically, a loan is for less than the purchase amount?

 

[Pat Butler]

Robert- my mistake. We actually drew up a contract at a higher sales price. I had bought the house really cheap so there was plenty of equity, so the appraisal at the 'inflated' price was no problem.

The cash back ocurred after closing. I had purchased the house from a friend, so the coordination of how everything worked went along really well.

 

[PropertyEconomics]

Robert- my mistake. We actually drew up a contract at a higher sales price. I had bought the house really cheap so there was plenty of equity, so the appraisal at the 'inflated' price was no problem.

The cash back ocurred after closing. I had purchased the house from a friend, so the coordination of how everything worked went along really well.

WHO did the "cash back" come from?

 

[Pat Butler]

The seller.

Let's say that the contract balance was $200K. You write up a contract for $220K and the seller gets the $220K and gives back $20K. All assuming that the value of $220K is there in the first place.

What's nice about doing it that way is that the lender considers it a normal sale. With refis, they're likely to keep the LTV lower (like 80%) is it's a cash out refinance. This technique keeps it as a normal sale. But, it does require the cooperation of the seller which is pretty hard to do under most circumstances. In this case, I had the property from a friend of mine.

 

[PropertyEconomics]

The seller.

Let's say that the contract balance was $200K. You write up a contract for $220K and the seller gets the $220K and gives back $20K. All assuming that the value of $220K is there in the first place.

What's nice about doing it that way is that the lender considers it a normal sale. With refis, they're likely to keep the LTV lower (like 80%) is it's a cash out refinance. This technique keeps it as a normal sale. But, it does require the cooperation of the seller which is pretty hard to do under most circumstances. In this case, I had the property from a friend of mine.

I get the situation .... just not sure that what you did is legal .... there is a reason lenders do not allow cash back from the seller ... I dont think Id post much more about it if I were you.

 

[Pat Butler]

Well, the loan was paid off a long time ago. Not only that, but the seller was an attorney and his opinion was that it was legal because is didn't change the equity position of the lender. It only worked out because I had rehabbed the property while under contract for 5 years and had built up a lot of equity. So even with the cash back the lender's position was the same as what they started with and had agreed to.

Where things go wrong, and illegal, is when the cash back from the seller results in secondary financing that can harm the lender's interest. In my case, there was no additional financing secured to the property.

 

[Riick]

Given that the value was there - I believe it's legal, certainly happens all the time.
Have to wonder though how the Seller handled a $220k sale tax-wise.
Now if the gain was excluded under that every two years owner-occupied $250k of sale is excluded rule, that's one thing.
Otherwise, Buyer gets $20k free and clear, & Seller gets to pay tax on an extra $20k in (presumably) capital gains.

<shrug>

 

[JGuerrera]

Of course I am not an attorney but here goes my fifteen years experience as a salesperson and Real Estate Broker...a contract for deed transaction is synonymous with a leasehold estate, why? Under a contract for deed the lessee/buyer does not take legal title or ownership of the property but only has possession..no different than a typical landlord/lease agreement with the exception of a future purchase price once the terms of the "rent to own" terms of agreement/contract for deed is satisfied at some future date. In order to consider whether a particular transaction is a valid sale is by looking up the definition of real property ownership rights or Fee Simple Interest. The buyer does not have fee simple interest but a leasehold estate, therefore, a contract for deed transaction (Leasehold interest) is not a sale. A sale is assumed by transfering fee simple interest or title from one party to another. A contract for deed does not satisfy the "ownership test". Right this one off and check box as "other". You cannot refinance or purchase real property without conveyance of title!!!

 

[Pat Butler]

Your state may be different, but in Illinois the buyer has equitable title which gives the buyer many rights that far exceed any leasehold interest, and even the IRS recognizes the buyer as being able to write off interest and property taxes. That certainly exceeds a leasehold interest.