Contract For Deed ? ? ? ? - Posted by Rob (Georgia)


#1

Posted by John Katitus on December 15, 1998 at 02:38:35:

Just for info: In Ohio, a Seller has a simple, speedy forfeiture action available under a Land Contract if the Contract has been in effect for less than five years or less than 20% of the purchase price has been paid before default.


#2

Contract For Deed ? ? ? ? - Posted by Rob (Georgia)

Posted by Rob (Georgia) on December 11, 1998 at 08:41:00:

What is a Contract For Deed ? I have a Va loan property I can get from a seller and, Va will allow contracts for Deed.

thanks


#3

Re: Contract For… Lay Away Plan? - Posted by Bill Gatten

Posted by Bill Gatten on December 12, 1998 at 19:03:12:

Please… (Man! You guys must be getting tired of this song…)

Rather than a Contract for Deed (which is basically a lay-away plan, wherein you don’t own anything, including the tax write-off, until the contract has been paid off): consider a 3rd party trustee land trust conveyance. In so doing you don’t have to worry about any lender’s due-on-sale clause, and you get the full tax write-off from day one (the seller can even keep the passive depreciation write-off); neither the buyer or seller, through their own untoward actions can ever bring about a lien on the property (pre-existing actions and mechanics liens notwithstanding); no one knows you business, and you are free to continue buying all the real estate you want.

You merely set it (the land trust) up as a legal shield for accomplishing exactly the same objective, (without the negatives) that you’d have in a Contract for Sale, Lease Option, Purchase Option, Wrap, silent second (or??).

Let me know if I can be of any help.

Bill


#4

Re: Contract For Deed ? ? ? ? - Posted by Jason-DTX

Posted by Jason-DTX on December 11, 1998 at 22:15:32:

You may be confused by your seller. VA used to sell off its foreclosures on contracts for deed back when it was overloaded with foreclosures. Your seller may have bought that way and that is why he is teling you that VA allows contracts for deed or it could be an old NQA. You need to tell us more information. How old is the VA loan?, is it a CFD or a note and Mortgage/Trust Deed?
Jason


#5

NOT a wrap… - Posted by David S

Posted by David S on December 11, 1998 at 19:27:50:

a contract for deed is not a wrap, although it may be used as such.

a contract for deed (land contract) is an installment contract giving the buyer all rights of ownership without title (deed) transfer until all or a specified part of the sales price has been paid.

David S


#6

Re: Contract For Deed ? ? ? ? - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on December 11, 1998 at 10:04:55:

A Contract for Deed is a document filed at the county courthouse. It basically “wraps” the original mortgage. The seller agrees to pay the mortgage (in most cases) and you agree to pay the seller the payment for the loan that you get from them. The Contract for Deed should specify exactly the terms (length, rate…) and what would happen if you should not pay. These can be dangerous for the buyer in that if the seller says they never got your monthly payment, they can usually evict you and retain all of the money you put in. I would recommend using the Contract for Deed for only a short period of time to build up the equity in the property so that you can refinance. Have you looked at whether the VA loan is assumable? Some are and they have terrific rates, but most require that you occupy the residence.


#7

Re: Contract For… Lay Away Plan? - Posted by JohnBoy

Posted by JohnBoy on December 13, 1998 at 20:43:10:

Why do you say you don’t own anything including the tax write offs until the contract is paid off?? This is not true.

I purchased my home on a contract for deed and I did get the tax write offs. I paid the property taxes and I wrote them off. I did not own the property by having title in my name, but I did own it by having an equitable interest in the property. Not only did I get to write off the taxes, but I also got the homeowners tax exemption. All I had to do was show my contract to the tax assessor’s office and they gave me the homeowners exemption.

My contract was held in an escrow account at the title company along with a quit claim deed signed by me in the event I defaulted on any payments along with a warranty deed signed by the seller. My contract clearly stated the amount to be paid each month that was principal and interest, amount for taxes, and amount for insurance. The homeowners policy was in my name, naming me as the owner and the seller as loss payee and additional insured. This was according to the terms of our contract.

The seller was allowed to take out any loans against the property up to the amount I owed him on the property. Any amount or liens encumbered against the property by the seller above my pay off amount would have resulted in the seller being in breach of our contract. By recording my contract this would prevent any lender loaning more than the amount I owed to the seller.

The only difference between this contract for deed vs. a mortgage was I did not have title in my name, but I still had an equitable interest in the property with a contract that named me as the person buying the property for x amount of dollars. Any value above that amount in which the property was worth was equity that belonged to me the buyer.

In the event I would have defaulted, the seller could have called the title company to record the quit claim deed to take the property back instead of going through the foreclosure process providing I was going to just walk away, or I could have retained my attorney to go to court and claim my equitable interest by getting the Judge to force the seller to go through the normal foreclosure process which would buy me enough time to reinstate the contract, refinance, sell it or sit in the property for nine months while the seller foreclosed.

If you had a 30 year ammortized mortgage with a 5 year balloon, would that be considered a lay away plan? Aside from having title in your name vs. having an equitable interest in the property, what would the difference here be? If you can’t pay off the balloon, the lender can foreclose. If you can’t get refinanced when your contract comes due, the seller may try and file the quit claim deed and evict you. But if you made your payments on time and had a problem getting refinanced to pay off the contract you could hire an attorney and go to court to try and get the seller to go through the normal foreclosure process buying you time to sell the property or get new financing before you run of time going through the foreclosure process.

The bottom line is, use a good contract that protects your interests, record your contract to protect your interests, and perform your end of the agreement and you shouldn’t have any problems when you go to pay off the contract by either, refinancing or selling the property to someone else.


#8

Re: Contract For… perhaps - Posted by David S

Posted by David S on December 12, 1998 at 22:16:58:

as I recall, a contract for deed (land contract) could be used with a security instrument (security deed) while issuing a general warranty deed to the buyer, subject to the security deed.
If this is correct, the buyer would have all tax benefits.
Seems this is used on land projects, usually when the seller has clear title and offers financing in security deed states.

any input?

David S


#9

This might help - Posted by Jim Simons

Posted by Jim Simons on December 11, 1998 at 11:56:03:

Tim is right. There may be some risk involved if you are depending on sending the seller payments.

You may want to see if your RE Attorney or a Title Company will act as intermediary, recieving payments from you and dispersing the money to both the seller (amount of payment you owe him) and to the Mortgage Company. This way you’ll have proof of the payments you make, and you can make sure the Mortgage Payments are made.


#10

Re: Contract For… ? - Posted by Bill Gatten

Posted by Bill Gatten on December 14, 1998 at 14:31:25:

John,

It doesn’t appear that you’re asking a question here; but that you are just making a statement: e.g., that I was incorrect in suggesting that land contracts within themselves don’t allow for tax deductions by the contractee. No offense taken, but forgive me for sticking my nose in again.

However…

The fact of the matter is that the instrument you described (re. your own home) sounds like MORE than just a land contract. As I pointed out in my post, a land contract in conjunction with a contract “Of” sale (TODAY, versus a contingency), which does convey an equitable interest (“equity”) solves the problem of tax deduction. That’s the subject of the Belden case that I refer to so often in my posts). As I see it, the only problems that could be encountered in the transaction you describe, are that since you have taken an “equity interest,” the sale may be a taxable vent for your seller. Further, he (the seller) would have a tough time evicting you if you didn’t make your payments (judicial foreclosure, ejectment action and a quiet title action: since eviction is not an option). When you are the buyer in this kind of arrangement, despite any problems there could be, it works better than when you are the seller. Your personal arrangement is obviously not bad for you, and any potential risks that could be present are just taken for granted by those who do these kinds of transactions (I’ve done a few myself). Nonetheless, your house could (as remote as the possibility might seem to be) become the subject of certain legal or tax problems on the part of the seller, since he’s still on the loan and still on title (we had area director a few years back, who prior to coming with us, was involved in two separate law suits involving land contract transactions, wherein the sellers had been hit with massive tax liens (after create the contracts for sale), whereupon the properties became involved in the problems. They were unable to be disposed of during the law suits (due to lis pendens actions, I presume).

And, too-- good/bad/indifferent… possible/not possible… likely/not likely… the arrangement you described is a Due-on-Sale violation (I know, guys, no lender EVER calls a note because of a due-on-sale violation… unless they want to); but be that as it may, if you had it to do over again, why not consider a transaction that doesn?t not create an obstacle to eviction; does not jeopardize the property or title relative to either parties suits, judgement, BK’s, tax liens or martial disputes… or create a taxable sale today, much less a violationof the due-on-sale clause (?if such an animal did in fact exist)?

Honestly, it sounds like you have a nice arrangement and one your comfortable with. I’m sincerely glad you’re pleased with it. Seldom can any transaction wherein both parties are happy with each other and the deal itself be beaten.

The IRS test for a “qualified residence” deduction:

1 Do you make the payments?
2 It it your principal place of residence?
3 Do you have a contractual obligation to pay all deductible amounts?
4 Can you prove a full assump;tion of all risks and budens of ownership (possession)
5.Can you prove that you have an “equitable interest,” in the property, or that you hold a beneficiary interest in an estate or trust that has an equitable interest?

(i.e., IRC Sec. 163 - specifically 163(h)4(D))

Respectfully,

Bill Gatten


#11

Re: Contract For… perhaps - Posted by Bill Gatten

Posted by Bill Gatten on December 14, 1998 at 15:36:29:

David,

In essence, here is the test (IRC 163, etal.):

  1. Does the tax payor make the payments?

  2. Is the tax payor contractually obligated (to pay all costs, with specific regard to deducitible items)?

  3. Does the tax payor live in the property as his principal place of residence?

  4. Does the tax payor have all the risks and burdens of ownership (i.e., does he have to fix stuff that breaks, and would he lose money if the market dropped)?

  5. Can the tax payor prove that he/she has an equitable intereest in the property (note that with a land trust, he/she has no such equitable interest): OR…(if not) does the tax payor then have a “beneficiary interest” in an estate or trust which has an equitable interest in the property?

In all candor David, like I mentioned to Mike, the situation your are describing (involving a security instrument), if it contains a Contract “OF” Sale, as well as the Contract “for” Sale, is more than juat a land contract or contract for deed. This sounds a lot like the “Cal-Vet” loan here in Ca., whichis a fully recorded Land Sale Contract with a Contract “of” Sale and with full conveyance of equity and all of the rights of use, posession and ownership.

A test of the viablility of a contract of Sale [too] often involves whether the transaction has been officially recorded or not (unfairly applied by taxing authorities: as failure or refusal to record has nothing to do with actual ownership of any asset–it’s merely constructive notice of the owenership. The purchase of my computer and my lawn mower wasn’t recorded; but no one better ever mess with 'em, 'cause I have serial numbers and a Bill of Sale… although if I stole yours, and recorded them under U.C.C. regs, with their serial numbers, it could be REAL tough for you to get 'em back!

Good luck.

Bill Gatten