Lately in the Secondary Note Market, a lot of Note Buyers have been purchasing non-performing or performing contract for deed’s/land contracts instead or in addition to traditional bank created 1st or 2nd lien non-performing notes. I’m sure each investor can give you reasons why they are or aren’t buying Non-Performing CFD’s (contract for deeds), but personally, we are loving the opportunity they are bringing to the market for us a Nationwide Note Buyers. While they have a lot of benefits there are negatives involved as with any investment. This post will walk you through why we’re buying as many of these as possible and how some of the benefits/negatives have effected us.
Before we dive in, it’s imperative that you understand what a Contract for Deed is. A Land Contract Installment, also known as a Contract for Deed, is a form of seller financing. It is similar to a mortgage, but rather than borrowing money from a lender or bank to buy real estate, the buyer makes payments to the real estate owner, or seller, who remains on title until the purchase price is paid in full. It is a tool that can allow buyers who either don’t qualify for traditional lending options or who want a faster financing option to purchase property.
The main seller of CFD’s on the secondary market is one large hedge fund that owns A LOT of real estate (almost all CFD’s are being created then sold from this one hedge fund). They buy the properties as REO’s from Fannie or Freddie Mac in bulk, then create a Land Contract Installment with a buyer who likely could not qualify for traditional financing for a variety of factors. Most of the time, they are sold to the buyer in as-is condition.
- You can buy these notes for CHEAP, and I mean CHEAP!
- We are picking up non-performing contract for deeds in the range of $6,000 – $12,000 normally around 35% – 45% of the CMV (current market value). If it’s a semi-performing or recently defaulted loan (stopped paying in the past 2 – 3 months), we can typically buy them for around 50% – 60% of the UPB (unpaid balance). That means we can purchase more deals at a better price allowing for a higher yield for our company and investors. One of our latest Non-Performing contract for deed purchases was in St. Louis, MO, purchased for only $6,500. Our realtor told us, in its as-is condition, we should be able to sell for $43,000! That’s an expected profit of a roughly $30,000 in just 4 – 5 months. The property is vacant and we are maintaining the lawn & property until we have marketable title. Another one we purchased, defaulted recently (only 2 months of non-payment). We are buying it at 37% of the current market value and 59% of the unpaid balance. If we are successful in getting them repaying, as we hope to do, we’ll be passively receiving an 17% return on our money.
Take a look at some of our “slam dunk” Contract For Deed Deals below.
2. There is a lot of Inventory.
- We are getting updated list of recently defaulted or seriously delinquent CFD’s about every month or every other month. The list often has 90+ properties for sale nationwide. When inventory is high, that means we’re able to purchase more quality notes!
3. Most of the time you can file “Forfeiture” instead of having to Foreclose.
- Since a CFD is a form of seller financing that allows the seller to remain on title, the majority of the time (depending on several factors that very from state to state), you don’t have to foreclose on the loan and mortgage in order to have marketable title. There is a legal procedure called forfeiture, in which the seller can cancel (“forfeit”) your rights under the contract. Forfeiture is often less expensive than a traditional foreclosure, and is much quicker (average of 45 – 90 days start to finish). While forfeiture is an option in some states, not all 50 states allow forfeiture, and many have restrictions on when you can file forfeiture or when you have to foreclose. We like to use this website for reference to help us understand more about each state’s requirements and procedures. As an official disclaimer, if you are looking at purchasing a CFD in a particular area – contact a local attorney who can give you sound legal advice rather than finding your answer in a blog or online. As we like to say, trust but verify.
While we know it doesn’t always happen this way, we’ve found the majority of our CFD purchases to end with forfeiture or a Deed in Lieu (DIL). This means we are saving money and gaining title to properties in as little as 4 months from our purchase date. This increases our yield and profits and makes our company and investors happy!
- Conditions can be great or really, really, REALLY bad.
- As we mentioned before, the hedge fund that is creating the majority of the CFD’s are selling in “As-Is” condition. Let’s just say the As-Is condition can vary greatly. We’ve seen homes that were move in ready when the seller got them as an REO and we’ve seen some that were a complete inhabitable wreck. Regardless of the condition, the buyer that purchased the home is now responsible for doing the work themselves, or paying (unlikely), to have the work done. We’ve had properties without kitchens, no gas (in Ohio might I add), dead animals in the basement, no flashing behind wood which led to the WHOLE home rotting, and those were just a few of our CFD properties…
Take a look at some of the worst of our CFD’s.
- With notes in general you aren’t able to get inside the home prior to purchasing the note, which is one of the riskiest factors of note investing. We’ve also had CFD’s that once we got inside were in perfectly fine or nice condition, and we’re easy to sell. You just never know.
2. Know your Value and Price for the worst.
- Considering the variance in condition I mentioned in the previous “negative”, to investing in Contract for Deeds the most important factor of your purchase is your value. You must have a good idea of the As-Is value and price it preparing for the worst. We have seen a few investors pick up CFD’s for just a few grand too many and once they get inside find out the bought it for more than the could sell for because of the condition. You have to be 100% confident and make sure even at a wholesale price, you can walk away with a nice profit.
3. Know your Laws, Forfeiture is not always the option.
- This one is under benefits and negatives because if you don’t know your laws, or didn’t consult a lawyer (as suggested) you could expect a quick turn around 30 – 90 days and just $1,000 to file forfeiture to only find out it’s $4,500 and 10 months minimum to file foreclosure. If you don’t know the outcome based on the loan information itself, it could make or break your deal.
While this is just a drop in the bucket compared to the options and benefits/negatives of buying CFD’s, it does give you a good idea of why our company has benefited from purchasing them, and hopefully help you see how you can benefit too!