# A hypothetical question



## MJsLady (Aug 16, 2006)

Pretend you had a contract for deed on a house for $45,000.
The house is run down and will cost $1,000s to repair (For giggles lets say $15 to 20,000)
You bought the house from another person 1 year ago for $35,000
You have collected payments on it of $5,000

If the buyer came to you with $35,000 to buy it out would you sell?


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## Evons hubby (Oct 3, 2005)

Ok, lets assume you had to borrow the original purchase price... or at least 80 percent, which is quite common. You most likely paid a couple of grand in closing fees when you bought the house. Appraisal, points, legal fees etc, and then you have most likely paid 7 or 8 percent interest on this type loan for a year. Taxes and insurance added to the equation, and you probably have about 39k in the property as of today. Subtract the 5k paid to you so far, and you can see an easy grand profit for your trouble. (hypothetically of course) 

Now the question becomes how much do you stand to gain or lose if you let the contract for deed run its course. Hopefully you are collecting more in interest than you are paying by at least a point or two. You also stand to gain that higher rate on the extra 10K over the length of the loan. Thats the plus side, but you also need to look at the odds of this "buyer" actually going full term and not defaulting at some point in the future. (sad, but it does happen) Are they keeping the place up? Will it be worth as much as it is today if they default 10 years down the road? less? more? In the event of default, what does your contract say? Are they going to be able to recover any or all of their equity? Or is the money they have paid simply to be considered rent? These are all factors that need to be entertained before making your decision. You can take a little profit now, very little when you consider you have invested 35k for a 1k return, or you can hang in and wait it out for a much better return on your investment over the course of the contract. Best case scenario, is they fix the place up for you out of their own pocket, pay it nearly off and default leaving you with a nice property worth 4 or 5 times what you paid for it and a handsome profit. Dont count on that one though, that one rarely happens. 

I happen to be in this position at the moment with a couple of houses I sold on contract. I would not accept the 35k on either of them, but would entertain a 40k offer on one and possibly a 42k offer on the other. I have another that I am into for well over 60k and would jump all over a 50k offer just to get out of.


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## MJsLady (Aug 16, 2006)

Thanks YH.
The folks I am researching this for do not wish to spend their money to fix it unless they pay it off first.
Mostly this is because they have already been jerked around on this. 

They bought the house form seller A on a 15 year mortgage.
Seller A then sold it to Seller B (current seller) as a 30 year fixed at 9%
Basically wiping out the 7 years of payments they had already made. 
Makes no sense to me but they could not move at the time.

Now since I have been researching we have found that it is not filed as a CFD with the county tax folks. According to their records the buyer does not exist. I did find that they can file the papers themselves whether the seller does or not

The house is literally falling a part. Pieces of the kitchen are sinking (pier and beam, one pier got washed out when a washer leaked, before they moved in) It needs new siding and a new floor in both bathroom and kitchen and many other things the buyers can help do but will have to pay for supplies and some labor.

They are not willing to invest $20 g into a home just to have the seller sell it again and end up with a new set of problems, kwim?
On the other hand, if they took that $20 and the $35k they are willing to pay they might find a decent home elsewhere. At least one not needing quite so much work!


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## Evons hubby (Oct 3, 2005)

Interesting. I know laws vary from state to state, but in my state, along with every other state that I know of seller A was/is in violation of the law when he sold this property to seller B while it was under a contract for deed. I have done this myself, (bought property that had been previously sold under contract for deed) but only if the contract holder was agreeable to the deal. I of course drew up a new contract for deed with the same terms as the original, protecting the contracted buyers interests, just as the original contract stated, and gave credit to all payments previously paid. IE... in my state it is a felony with severe jail time to pull the stunt your seller A pulled, and I am pretty sure (although I am not an attorney), that your seller B could very well be his bunk mate. Your buyer needs to file his/her copy of said contract for deed with the county the property is located in. The seller is under no obligation to do so, but it is in the buyers best interest to do so. Had they done this in the beginning, chances are they would not have found themselves in their current situation.

Again, the terms and conditions of the original contract count. Without knowing those details its difficult to give you any real advice.... your friend needs to get hold of a competent attorney, go over the terms and see what their options are. Some contracts will not allow just walking away from the property without suffering legal repercussions!

Lemme guess, our buyers entered into this deal on their own, without benefit of a licensed realtor?


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## MJsLady (Aug 16, 2006)

My advice at this point if they wish to proceed is make the offer, if he turns it down decide what they want to do from there.
I also advise having an attorney draw up any papers and witness it.
Yes from reading the contract they can walk away. It would be looked on as a foreclosure but this guy can not ding their credit and Texas is one of the states that does not allow you to be sued for bad mortgages.

Yes they made this deal with out seeking advice (which is why they are asking me now... they think I am smart... I can read most legalese and understand it, which I guess puts me a rung above them???)


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## Evons hubby (Oct 3, 2005)

MJsLady said:


> My advice at this point if they wish to proceed is make the offer, if he turns it down decide what they want to do from there.
> I also advise having an attorney draw up any papers and witness it.
> Yes from reading the contract they can walk away. It would be looked on as a foreclosure but this guy can not ding their credit and Texas is one of the states that does not allow you to be sued for bad mortgages.
> 
> Yes they made this deal with out seeking advice (which is why they are asking me now... they think I am smart... I can read most legalese and understand it, which I guess puts me a rung above them???)


My advice for them at this point would be to have them take their original contract for deed to an attorney, tell the attorney what went down. I have a feeling that both the current and previous seller will be quite eager to conclude this transaction without court proceedings involved. Pretty sure there could be felony charges against seller A and that might also go for seller B if they have violated the terms and conditions of said contract. Something about fraud and breach of contract. They need to let an attorney handle all negotiations and NOT say anything to either seller concerning the possibility of bring formal charges. Thats a whole nother apple to be squeezed that could go against them. Wishing them all the best.


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## willow_girl (Dec 7, 2002)

> Hopefully you are collecting more in interest than you are paying by at least a point or two.


I'm surprised that you found a bank willing to let you selling a mortgaged property on a land contract.


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## Evons hubby (Oct 3, 2005)

willow_girl said:


> I'm surprised that you found a bank willing to let you selling a mortgaged property on a land contract.


That has never been a problem in this area, as a matter of fact I have not only never had a banker question the practice, I have had bankers approach me to do it. Something about preferring to have me owing them the money than the person currently living in the home.


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## willow_girl (Dec 7, 2002)

Different states have different norms. In Michigan, where I'm from, that would never fly ... at least not with a residential loan. Might be able to swing it with a commercial loan, or (of course) private financing.

The LC does encumber the deed to some extent -- I suppose that's why bankers shy away from it.

Last house I sold on LC included a clause that allowed me to mortgage the property up to the amount of my interest. So, say the buyer still owed $90,000 -- I could borrow against the property up to $90K. 

I'd never sign a contract like that as a buyer -- if the seller defaulted, you'd have a real mess on your hands -- but the buyer never batted an eyelash, so ... :shrug:


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## MJsLady (Aug 16, 2006)

YH, that is another consideration.
Would you rather the current person who pays on time and such pay off the home or move, leaving you with the unknown next person.
A lot of folks out here move in trash a place then move out leaving the seller to fix things for the next person. 
these guys got the house on the already junky side and planned to fix it but life intervened and they couldn't.

Now they have a choice but they are also sadder and wiser than they used to be and are not willing to risk money so easy!


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## Evons hubby (Oct 3, 2005)

willow_girl said:


> Different states have different norms. In Michigan, where I'm from, that would never fly ... at least not with a residential loan. Might be able to swing it with a commercial loan, or (of course) private financing.
> 
> The LC does encumber the deed to some extent -- I suppose that's why bankers shy away from it.
> 
> ...


All of my mortgages are with banks, and are indeed commercial loans, and no, I dont think it would fly with a mortgage company either. My bankers know me, and that their money is secure.


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## Evons hubby (Oct 3, 2005)

MJsLady said:


> YH, that is another consideration.
> Would you rather the current person who pays on time and such pay off the home or move, leaving you with the unknown next person.
> A lot of folks out here move in trash a place then move out leaving the seller to fix things for the next person.
> these guys got the house on the already junky side and planned to fix it but life intervened and they couldn't.
> ...


I would much rather my buyers pay as they should and take care of the property of course. That just works out well all around, my buyers have a home, I make a little money and the banker gets paid back too. This is how its supposed to work. And yes, I am well aware of how some folks will trash a place and leave me with the mess.... its happened more than once.


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## edcopp (Oct 9, 2004)

"Lady", the first thing that the folks you are doing this research for need to do is: fire you.

Next they need to hire a real lawyer. A lawyer might be able to read the documents and find out first, if a contract does even exist. Then if it is legal. 

That would at least be a good place to start.


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## MJsLady (Aug 16, 2006)

Yep Ed. I have told them they need a lawyer and that is the next step.
They needed to see it from outside the situation first.


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