Contract for Deed vs Deed of Trust

[Brent Wickersham]

Looking to possibly sell a rental house to its current tenant using seller financing in MS. My initial thought was to do a contract for deed. My understanding is that foreclosure would be easier and less expensive if the borrower stopped paying even though we'll have to retain title for now. When I started calling real estate attorneys in MS about this, I was strongly advised against doing a CFD because of litigation risks in the event of foreclosure. Talked to 2 different RE attorneys, both said the same thing... go with a deed of trust or do a lease option. For the note buyers that have had to do foreclosures (I'm assuming everyone has), have you ran into more or less problems with CFD's? Have you had any problems in court with these? Do some note buyers avoid CFD's altogether?

[Tracy Z. Rewey]

@Brent Wickersham I have worked with CFDs (aka Contract for Deeds, Land Contracts, Installment Contracts, Real Estate Contracts, etc.) since the late 80's. They have gone from being labeled the best thing since sliced bread to the evil tool of destruction used by predatory lenders. Like so many things in life, the truth is somewhere in between.

As mentioned here it varies greatly by state with some states making it as hard or harder to foreclose on a CFD than a mortgage. If you have a choice and are creating it upfront then the best course of action is usually using a Note and Deed of Trust (or Note and Mortgage if that state doesn't use the DT). If you are buying an existing CFD you need to know your seller. Just google: Harbour Portfolio contract for deed, and you will start to see the reasons behind the shift. There is still quite a bit of that inventory out there.

Do I still buy Contract For Deeds? Yes, depending on the state, the seller, and the paperwork. We have an expanded due diligence checklist we use for the CFD - with one of those being ordering title insurance (rather than just a report). You are taking fee simple title and that comes with inheriting some additional responsibilities (and potential transgressions of prior owners). You also have the legal obligation to deliver a deed and clear title once the buyer has paid the CFD in full. This is a greater obligation than just releasing your mortgagee's interest on a mortgage or your beneficial interest on a Deed of Trust.

We also work to convert them whenever possible. This gives the buyer fee simple title and creates a more standard set of documents. There are some institutional type investors on the secondary market that will not buy CFDs so the liquidity and price generally increase if you convert to a the standard DT/Mtge used in that state by traditional type lenders.