Contract for Deed vs Deed of Trust

10 Replies

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?

Some investors avoid cfd's or end up converting to mortgages because land contracts are either illegal or treated as mortgages in certain states. They also have a bad rap because of the historical, predatory uses of land contracts. If lawyers in that state are telling you to avoid land contracts, maybe you should. For the record, I have had two.

I am curious.. What are they saying are the litigation risks?

@Brent Wickersham

In mississippi there is no reason to do a contract for deed as the foreclosure process there is pretty quick already. The attorneys are correct

I have converted many of my cfd’s to traditional deed of trust/ mortgage in states like MS, TN, MO for these same reasons

@Terrence Evans

If it’s performing for more than 12 months you do not need a RMLO as borrower qualifies for ability to repay as all you are doing is replacing the security instrument (assuming you are not changing any loan terms or amounts).

Most if not all good board certified real estate attorneys will likely tell you don't use contract for deed in Texas.  From what I understand it is not illegal, but so hard to follow the laws regarding it now, that it is extremely risky for investors to use it.  At one time maybe 20 years ago, it was very common, but was abused so much, like by roofers and contractors and maybe some slumlords, that the legislature basically made it all but illegal.   In Texas it is probably most common to use a deed of trust to secure the mortgage.

MS may be a whole different animal.

With a deed of trust you're the bank and have the house as collateral for your loan to that buyer. With CFD you still own the house until the contract is paid down and therefore still have all the liabilities that come with home ownership. So for me, cfds are not worth the risk just for this reason alone as well as the liabilities mentioned in the posts above.

@Terrence Evans

They basically indicated that if the property were to go to foreclosure and the borrower decided to fight it, then a cfd (doesn't matter how common the terms in the contract and interest rate) could be viewed by a court as a bad contract / predatory as you mentioned, etc and it may end badly.  He said that deeds of trust are something courts are used to seeing and it wouldn't be a problem.  

As someone who is studying note investing, this really piqued my interest as far as investing in CFD's. They seem to be very common on places like Paperstac. It sounds like most of you who are investing in these are looking to convert them as soon as possible. I would think that avoiding CFD's as a note buyer would limit one's available inventory.

@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.