Contract for deed questions (Seller Financing)

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I recently bought 2 houses in a lower income area of Omaha, NE. I am interested in selling them via 'Contract for Deed'. I own them free and clear. I was going to set the loan payments around what normal rent would be and ask for $2-5k down (holding a portion of that aside with the thought that if they default I may need to use it to bribe them out of the house in case of default - 'cash for keys'). I was not going to put a balloon on these notes at the end of 2, 3, or 5 years but rather extend the note out 10-20 years and hold the note the entire time. I am new to this though and have some questions if anyone can offer advice I would appreciate it.

1. Do I need to have a loan servicing company service the loans? If so, whats a good one? (I would like to report their payments to the credit reporting agencies and as I understand it, this is the only way to do that.)

2. Do I have to record these transactions with the county registrars office? Or can I keep it an unrecorded transaction until the last note payment is made?

3. Any other advice anyone can offer?

Thanks!

HI Justin, I would put the properties in an LLC in case you have problems later. Maybe even separate LLCs if there is a lot of equity.

In most jurisdictions if a Tenant Buyer stops paying on a Contract for Deed you have to foreclose on them. If they stop paying on a Lease Option you evict them. Very different processes. If you own the properties free and clear, no need in my opinion, to do anything other than have them do an ACH to your account or send you checks for payment. Your choice.

You don't need to record Lease Options, just make sure the two are separate documents and do not reference each other. You still own the property until they exercise the Option. Make the Option amount nonrefundable and if they don't exercise the Option, you don't have to return the Option amount. If they do exercise the Option, the amount is applied to the payoff.

In a Contract for Deed, they gain equitable Title which complicates things a lot. Make sure you get at least 10% to cover your risk. It gets applied to the payoff amount.

@kenmin I am putting them into an LLC. I am not planning on doing lease option. I was planning on doing contract for deed. The houses aren't worth a lot. One is worth around 40k and the other around 50k.

I thought that on contract for deed it is still treated as eviction as opposed to foreclosure because the deed is still in my name until the last payment is made. Is that not correct?

From my experience both LO and CFD should be an eviction but I had a lease option eviction that went before the judge and the tenant stated they had equitable interest in the property. I tried to argue my point that I was evicting on a lease but he would not listen.

I had all my documents right and neither referenced the other but the judge said since they claimed equitable interest I had to foreclose and he didn't care what my documents said. I could have appealed but I just worked things out with the tenant.

A friend of mine went through the same thing.

Hi Justin,

Before you do this, you need to do some serious research on CFD in your state, because each state's laws are different, and default is handled differently in every state. Some states allow forfeiture/eviction, some require foreclosure, and some have timelines and down payment guidelines for each. Some states outright dislike and discourage them. You can start by reviewing these online, and verify them with an attorney who handles these transactions in the state in question.

You definitely need a loan servicing company.  The one I have been using is cheap but not good, so I am not going to share their info.  I don't think that most report to the credit bureaus.  $15 a month is the norm, which should be paid by the buyer.  

You should record a Memorandum of Agreement or a similar instrument because that will not only protect the buyer, it will also protect you.  

Make sure you have a solid application and due your due diligence on the buyer.  I only sell to businesses and require an occupancy affidavit to further document the commercial nature of the transaction.  

Before you do this, make sure you get a very good contract and understand all of the laws.  It took me a long time to be able to do this because several attorneys I talked to wanted to use these lame boiler plate contracts that really didn't address many of the intricate yet important details that are a part of these transactions.  

Good luck!  If done correctly, these are great transactions.  

@Justin Bicket There are a couple of problems that I see the first is that it might be hard for them to get a loan for anything under $60k because it's not worth the cost for most banks but maybe a local credit union would do it. I would have them work on their credit and maybe appreciation could help as both go up.

The other problem is why I don't do these type of deals anymore. The majority of these deals go bad for all different reasons and it's a toss up if it's going to be easy or a nightmare getting them out of your house. Everyone is always roses and smiles when they move in but there are no smiles when it's time to get out. 

The third part that I'm thinking about is why is your cash sitting there tied up for so long? There are so many great places where you can leverage that money to have it sitting in these tiny houses for a decade or more seems not the best use of that money.

These are just some thoughts I have. 

I hope this helps.

Good luck my friend

Stephen

@Justin Bicket To add to what @Eric S. posted, to get them reported to the credit agencies is very expensive, I've been told around $65mo or more. 

Most states will require a foreclosure on a default of CFD.

You definitely want to file something with the county, in fact in most states its the law that you must do so, either file the CFD itself or at least a Memorandum of Agreement or Memorandum of Land Contract. This will protect you as well in case they ever try to sell the property without paying you.

Also, be sure to comply with your state's interest limits, every state is different and a mistake can make your entire contract unenforceable.  They could make you pay all the money back.

Regarding Dodd Frank, If you're set up as an LLC and the properties are owned 100% by the LLC, you're fine doing up to three of these within a 12 month period without being required to use a MLO, however you still must gather the right information and be able to document that you made sure they could afford the purchase and payments.

Also, I'd highly recommend setting up the payments to include PITI (Principle, Interest, Taxes and Insurance). Set up escrow accounts for the taxes and insurance. I didn't do this on my first one, and its been a pain because the buyer's insurance lapsed. So, now I always require it. You want to know the insurance and taxes are being paid. Also, its legal for you to add in the servicing fees to the total monthly, so (PITIS).

Good luck!!