How Does Contract-for-deed Work? Is It Worthy?
We have a condo in a nice area, and our pay-off balance is 95K. The condo will be listed with a realtor on 9/1/03 for 140K. A friend is interested in buying the unit so we knocked down the listing price to 136K if he can make decision within 45 days (the period that our realtor allows to sell to him without paying realtor commission).He is willing to put down 40K, but asking if we can finance him the rest with a 15-year loan at 5%. Does contract-for-deed a good way to go for? How does it work? What figures will make this transaction attractive to the buyer and profitable to us at the same time?
Thank you for sharing your professional knowledge!
Hi dwthesis,
A contract for deed is the way to go and this is a picture perfect example of when to use one. The buyer gets the deed upon completion of the terms of the contract (ie payment in full) so you maintain control of the property until then.
Based upon your numbers, your buyer will have a payment of $759.16 (PI) for 180 months (15yrs) which is probably better than any rental payment he might find. You would make over $40,500 interest over the term of the loan by carrying the $96,000 balance, plus the down payment of $40,000.
Best of luck
John (LV)
dwthesis,
"We have a condo in a nice area, and our pay-off balance is 95K. The condo will be listed with a realtor on 9/1/03 for 140K. A friend is interested in buying the unit so we knocked down the listing price to 136K if he can make decision within 45 days (the period that our realtor allows to sell to him without paying realtor commission).He is willing to put down 40K, but asking if we can finance him the rest with a 15-year loan at 5%."
If YOU are owner financing this, 5% is TOO LOW....and with 29% down...WHY CAN'T they gat a NewLoan??!!
"Does contract-for-deed a good way to go for? How does it work? What figures will make this transaction attractive to the buyer and profitable to us at the same time?"
On a CFD...
If your "friend" does not pay..YOU have to FORCLOSE...if YOU do a L/O you can EVICT....
Forclose = 6 months - 1 year and 2.5K-5K
Evict = 6 weeks and about $300.00
it's YourCall.....
....as always,
GoodInvesting, Rocky
Check you state laws. Here in Michigan I do not have to foreclose. It takes about the same time to get a person out of a house under a contract for deed as it does for an eviction.
Tom
Thanks to all of you for the help! The buyer can get a loan about 6% with any mortgage company (based on what I understood). He want to finance with me and rent the property out to someone else for $1400-$2000 per month. I know he is doing the "sandwich" landlord in this deal. The question is whether it is worthy for me to let me finance him especially I am not sure how contract-for-deed works in Texas. If he doesn't pay me, how would I deal with his tenants since he is the one that signs the contract with his tenants? Would you please also explain what procedure needs to be done to keep the property when it becomes evicted? Thank you!
A RE contract would have some advantages a deed would not have:
One, a RE contract is normally not recorded, (and not notarized, so it's not even recordable.)
Two, a RE contract does NOT have to be foreclosed (which takes a lawyer to do), upon, but can usually be "forfeited" without a lawyer, so it's a good bit cheaper to do. Forfeiture procedure is simpler and cheaper than foreclosure procedure in most states.
Three, the title stays in seller's name until he's paid in full, or as the CFD's terms specify...and since a formal foreclosure is NOT done, or necessary, the seller stays in better control of the RE.
TX has a fairly new comprehensive CFD statute that makes it nearly imperative for you, the seller, to have a RE savvy lawyer do the paper work for you.
TX had so many scandals in buyers being mistreated by unscrupulous sellers that the TX legislature enacted this new "reform" law a few years back.
Its primary purpose was to protect the buyer from crooked sellers.
John is correct and if they (and TX Board of Realtors) have their way they will forceout the CFD as a binding doc. There have been many many crooked CFD people just like some Lease Options deals I have seen, they are only a form for some people to rook people out of their money and then their homes.
Contract for Deed is a good tool in the proper hands. So don't necessarily count it out as a tool, get an good advisior and help to make it the tool it was meant to be. And it is an absolute must to find a Knowlegdable RE atty, but buyer beware there too. There more cookie cutter RE atty's than not. Shop around use a few different ones til you find your fit. But do get one in our home team.
Unfortuately the bad apples have made it bad for investors here in TX, we are deemed all crooks and scoundrels.
A uphill battle I intend to win.
Good luck and be careful, remember to protect yourself while being fair to your clients.
What would be the criteria when you screen a RE lawyer? What kind of questions should I ask to determine if s/he is professional and knowledgeable? Thank you!
1. Ask them if they like RE
2. Ask them if they own their own property
3. Ask them how many properties they have bought in the last 10 years in the state that you are living in.
4. Ask them how closely they follow the market.
If the answers to any of these questions are No or something strange According to most of the investing material I've read don't go with them. These are just a few things that I have gleened in my reading and working hard at getting some property. Just thought it might be useful and decided to pass it on.
snappygator
[addsig]
The above suggestions are good. I have asked all kinds of questions, it is hard to say exactly which ones were the best or right ones. Trail and error <IMG SRC="images/forum/smilies/icon_confused.gif"> See if I can remember some q's.
First I call and introduced myself, what I do and asked if they would have time to talk.
During our little meeting I ask if they are familiar with the types of transactions I anticipate working with (take a list) and have a sample of one I am actually working on or doing. (If you dont have one make a sample one).
Since I am doing owner financing, foreclosures, HUD repos (rehab stuff)) and lease options I take a few contracts of these with me. I did not always ask enough questions on what they are familiar with handling and whom in their office I would really be dealing with. I do now.
I ask whom their escrow officer and closing agents are and which ones they recommend for "special" types of situations. Which ones are the most teachable and flexible. Are they familiar with transactions like lease options with delayed closings?
I want to know if they are the type of office that can keep my documents in simple plain but legal language that is easy for my clients (sellers and buyers) to understand.
I take deal with me too that was a sore spot with another office (the title office blacked out). The instructions given to the title office (this was an atty's office) that where clear and precise and then docs that were presented to me in front of the seller. I ask them to breifly read the first and then the second. I ask them if they find any thing admiss. If they say no, I as nicely as I can wind up the meeting and I thank them for their time. (this was a deal where the closing agent decided she didn't like our agreed terms so just ignored them and filled the docs full of such legal mombo jumbo to cover this fact up, but I am very familiar with legal mumbo jumbo so it did not fly, you should have seen the anger on her face with I contacted the attorney "her boss" on his cell and he had her re-write the docs right then and there at the closing. He was a good honest man but if you can't trust his people not worth your time.)
If things are going well I go over things like Lease purchase and contract for deed, first right of refusal, eviction proceedures, cash back at close to the buyer, subject to's - havent done this yet but I want someone familiar. I f they dont understand them I shake their hand and leave.
I also am very particular about the TX "warranty deed with vendors lein" these are used with owner finance deals here in TX and if you are the one buying can be very restrictive if not worded in a way to protect you the buyer becuase they are cookie cutter to protect the seller only and severely restrict the buyers ownership rights.
I think these were the TX RE regulators answer to the contract for deed that was misused and abused by both sellers and buyers in the past.
I have a really <IMG SRC="images/forum/smilies/icon_mad.gif"> with these. So I want the atty to know that I am looking for a atty that will be fair to both parties and within the law, but to follow the agreed to terms between me and my client. I want to keep things simple and not clutter them full of garbage words and unnecessary "safe" clauses and I need to keep them to a minimum.
Many of the people I deal with cannot or do not understand about half the garbage in the newer legal docs and I like them to fully understand what they are signing so the need to keep things as simple as possible. This is a requirement I have.
I hope this helps. I learn what works for me by trial and error. What works in one area or person doesn't always work for another. Test drive your attorney just like any RE agent or lender. I don't sign exclusives and if you find someone who will "fit" with your business they won't need to ask you to, you'll both be happy. But don't expect to get the right one the first time, just do you best to see that your chances are in your favor.[ Edited by Dreamin on Date 08/27/2003 ]