Contract for Deed in NC/ Note question - Posted by Georges Franco

Posted by Michael Morrongiello on September 12, 2004 at 22:04:23:

I agree with David, its tough to sort out exactly what has transpired here without reviewing some of the relevant paperwork.

However, if the current CFD-contract for deed holder is will to SELL their interest in that CFD, then depending on the credit profile, credit scores, payment history paid to date, and paperwork used, the CFD can be converted into a DISCOUNTED lump sum cash amount.

Thats the rub here, the CFD will be discounted. So the holder of that CFD will receive something less than what is actually outstanding and owed on the CFD.

Michael Morrongiello

Contract for Deed in NC/ Note question - Posted by Georges Franco

Posted by Georges Franco on September 12, 2004 at 11:58:42:

Client just bought a property for $56K and was able to pull some cash out. Property is currently occupied with tenant who signed a contract for deed with previous owner. Sales amount on contract for deed is also $56K (11% interest rate/30 years). House was last appraised at $83,500.00 a few months ago.

Since the current equity is already maxed out (as per contract for deed), can this client sell this note to someone who is willing to wait out the term?

Re: Contract for Deed in NC/ Note question - Posted by Georges Franco

Posted by Georges Franco on September 12, 2004 at 17:48:41:

Thanks for your reply. I’m a mortgage broker and I’ve done several deals for him before. However, this one was done in North Carolina and I am not licensed there. I think the purchase price to him was $40,000.00. The loan he got was for $56,000.00. He did buy it a discount but the seller could not sell it for more than $56K (amount of contract for deed). The seller bought it as an REO, fixed it up and entered into a contract for deed with current tenant. I was not involved in this deal but he mentioned to me that he was able to walk away from closing with some cash. I told him I am not an expert on note buying so I would post to get some responses.

Being that the house appraised for $83,500.00 a few months ago and the amount owed is only $56,000.00 and is currently in good condition, would the equity make this attractive to a note buyer? Also, the interest rate is around 12%, contract is for 30 years and the monthly payment is somewhere around six hundred and something…are these factors enough to peak the interest of an investor? I don’t think he wants any money (or very little). He mentions that he is nervous that these people will miss a payment and he will be responsible. He’s just looking for an exit strategy.

Bona Fides? - Posted by David Butler

Posted by David Butler on September 12, 2004 at 14:51:01:

Hello George,

Not sure what your role is, in that you have referred several times to your “client”… but based on informaiton you have provided otherwise, what the current title holder essentially did here - is purchase a “contract for deed” - which naturally requires the transfer of title to him.

In the absence of any other details, it would appear that he simply “overpaid” for the interest he now holds, under the fundamental parameters of “note” and/or “cfd” investing, in that as written, it appears he may have paid par value for note. The confusion lies in your reference to the fact that he “… was able to pull some cash out”. Not sure how he managed that, but due to that fact, it may be that he essentially did discount the note one way or another.

But in this situation, the occupant is clearly not a “tenant”, but rather, the equitable owner. Big legal distinction, though ramifications of that distinction vary widely by state.

The new Vendor now has the right to receive the remaining balance on the CFD at the rate and terms specified in the agreement, and to “terminate the equitable interest” of the Vendee in event of default, again according to the existing terms and conditions of the CFD.

Can he sell that CFD to another party? Certainly… provided he can find one! But there are several complications possible here.

One, he will face a very small market of potential of uninformed buyers who will pay will pay anywhere near par for that CFD in the absence of some other compelling circumstance that might make it attractive otherwise. Second, curious as to how he “pulled some cash out” of the purchase transaction, without somehow damaging the Vendee’s interest in the property - or alternatively - the interest of whomever brought that cash to the table? Not saying it can’t be done, as I am not the most creative REI on the block - but something doesn’t smell right about this thing?

If there was “actual” or “constructive” notice of the CFD, your contract holder may be in the position of giving up his “bona fide holder” status, in the event some liability was created to the Vendee or other parties to the transaction.

Not sure how this helps you here, but the best I can think of based on what you have stated and asked for. Hope it does something for you, and best wishes for whatever it is you are trying to accomplish here for your “client”.

David P. Butler