Should my Contract For Deed include a promissory note?

Question

I'm selling a property in S. Carolina via Contract For Deed (CFD). I have a good contract to use but one of my peers say that I should also have the buyer sign a promissory note as well. This makes sense to me, does anyone have any thoughts for any reason why a promissory note should not be executed in tandem to the CFD? Fyi the note has a balloon due in 36 months and the buyer is an investor who will be renting the property out, so I will assume that Dodd-Frank issues for owner occupant do not apply.

Thanks, Bob

Bob Malecki · Answer

Thanks for the, as always, excellent overview Dion. I've already determined that no PN is needed and your contribution provides more rationale as to why.

Bob

Cameron Skinner · Answer

In manny states a contract for deed has the legal effect of a mortgage.  In other words the property owes the money to the lender not the individual.  This goes back to common law in England when a some Catholic rule about a Christian could not charge another another Christain interest, so the "property owed the debt" not the individual.  A promissory note binds the individual to pay back the debt.  This is why when you get a loan from a bank you sign a mortgage and a promissory note at closing.  If you only have him sign a contact for deed your only recourse may be to foreclose on the property, again state specific, but promissory note would give you the option to sue for any money loss you incure above taking the property back.  Hope this helps, Good Luck!

Bob Malecki · Answer

Good stuff, thank you

Dion DePaoli · Answer

Bob here is a thread which flushed out many misconceptions of CFD's from a little while back.  https://www.biggerpockets.com/forums/70/topics/109...

Dion DePaoli · Answer

Contract for Deeds and Land Contracts are NOT instruments which secure notes.  No Promissory Note should be included in the paperwork.  The CFD/LC is all inclusive in the contracted rights and interests of the parties.A CFD or LC grants equitable rights to the property but not legal rights.  In CFD/LC the property is not collateral for a loan, legal property rights are retained by the seller and granted at the conclusion of the installment term.  So the contract itself is essentially a payment plan on the purchase price and upon completion the transaction concludes passing title from the Seller to the Buyer.  The duration of the CFD/LC requires the Seller to agree to hold that title in good faith.  All of that is included in the CFD/LC in order for the contract to be a CFD/LC and not simply a rental/leasing agreement.  So in other words, a proper CFD is the entire agreement and there is no note or security instrument - it is an all inclusive contract.

Our mortgage common law heritage stems from the equity of redemption not who charges who interest.  Not all debts carried interest nor did all pledges of security - real property or chattel - require interest to be paid.

CFD and LC being treated like security instruments after certain time limits by the court so that the buyer/borrower has a [fair] chance to redeem the equity in the property if they so wish.  This is what causes those instruments to have redemption terminating process that look more like foreclosure opposed to simply re-taking possession through eviction.  That is also what "foreclosure" is.....the termination of the equity of redemption.

Scott England · Answer

Bob

I believe you are referring to the "Ability to Repay" and Reg Z changes to guidelines outlined in the Dodd-Frank legislation.  Now, obviously this is not legal advice, but the best feedback the industry has gotten thus far (as I understand it) is:

"...loans that have a business purpose are not covered by TILA, and so  would not be covered by the ability-to-repay provisions as proposed and  adopted. Investment purpose loans are considered to be business purpose  loans."

If your investor is operating under an LLC or corporation, it should satisfy the above.  I would be hesitant if it was an individual that, say, planned to move in to fix and flip.

Hope this helps.

Desi Arnaz · Answer

Hi Bob,

I can certainly understand why you might think it's a good idea to have the buyer sign a promissory Note.

Over the years, I have signed many Contract for Deed agreements, but I've not seen any with a Note.

When you have a Note in real estate, we tend to secure the "promise to pay" with a security instrument (ie mortgage).  The reason for that is because in most instances, the deed to the property is transferred to the Buyer upon signing the Note.

When you have a C4D the title to the property remains in your name until the terms of the Contract are honored. If they don't pay, they don't get the Deed.

Strategically, I don't see the point.  But you should run it by your attorney for a legal opinion.

Should my Contract For Deed include a promissory note?

Most Popular Reply