Let's continue with our analysis of the Contract For Deed from the buyer's point of view after a quick review.

The past two articles have addressed several key points. The equitable interest acquired under an installment agreement, how equity may be established and future loan requirements. The ability of the buyer to perform under the agreement hinges on qualification for future financing and how proof of payment is necessary to establish the credit history and equities paid.

Servicing of the contract by a trustee or third party is worth seeking, but if such services are not available payments should be made to an account owned by the seller with little other activity in that account. Insurance provisions need to be in place in the event of any insured loss with the required loss payee provisions.

Underwriting is a function that protects both parties to the agreement and is necessary to establish the terms of the agreement that make the transaction successful. The term of the contract needs to be long enough for equity to be established and any credit problems cured, the two main reasons these contracts never close. And finally, notices required to existing mortgage holders must be addressed.

Moving on with a "Buy and Hold" strategy.

Sellers usually grasp the risks involved in selling under an installment agreement, but the buyer has risks as well. Nearly the same considerations are applicable to both parties. Who is the seller and what are the real circumstances? Earlier we discussed sellers who "churned" their properties. The seller who accepts a down payment and sets up the buyer to fail allowing an opportunity to take the property back and go on to the next victim. So who is the seller? You should check them out!

A quick way to investigate the proposed deal is to search the records at the court house, most all counties or parishes are now on line. From the property address at the Recorder of Deeds Office, you should obtain the name of the seller, as they conduct their business. Run the name and you should find the transactions your seller has been involved in. This is when you need to check and see if not only your subject property has been acquired more than one time by the seller, but any other properties. Now you have an idea of who you are dealing with. If it appears that your seller has taken the property back, once is OK, but inquire about it. If the seller has taken the property back twice or more, you probably have a "churner"! But, you can beat them at their game if you follow the servicing requirements previously described, proceed with caution.

There are still more issues to be investigated at the court house. Has the seller paid his real estate taxes, have there been any les pendis filings against your seller? Have any other liens been placed on properties held by your seller? If so, you should inquire about a title search! Now go to the court records and search the name for any actions. Has your seller had any tax liens in the past, especially by the IRS. I would never suggest buying a property on an installment basis from someone who has the potential of having federal tax liens filed against them. The IRS will have priority and they may get their money from your equity! 

Now, another buyer risk is with a seller who is a builder or contractor and this includes investors who fix and flip. Builders who take trades may take the property and have their construction crew do the work. Any work that has been recently done on the property can be a concern. Workman's' and material liens could be filed either the day before you do your deal or any time thereafter. Even though your contract will require the seller to clear these issues, what happens if the seller does not? Do you bring suit and put more money in the deal? Do you simply pay the liens? Clearing up these matters before you contract is the best way to go. If work was done, have the seller provide a lien waiver from those involved. Also, if work was done, was a building permit pulled? 

Most building regulation offices have everything on computer now, they are linked to the assessor's office and who know where else. Compliance rests with the property owner, the current property owner! If shoddy work was done without a permit gaining forgiveness can be expensive. Before you get involved, check and see if the property is compliant, if not, what will it cost to bring it up to code? We can leave this issue here as a property inspection is another issue.

Your due diligence is not over yet. If your seller is in a company name, you need to check with the Secretary of State in which the seller is registered and where the property is located. When a business entity is selling real estate that company needs to be registered appropriately and in good standing. If the company was formed and registered in another state, many states require that entity to be registered as a foreign entity and registered to effect any sale of real estate. Now, wouldn't that be something, be in a position to force sale under a contract that was invalid and have to bring suit against an out of state company or someone you can't find! Know who the Registered Agent is and the address for notices required. If you have a problem, you don't provide notice to a business entity by sending it to old Joe because you think he has the controlling interest in that company, you need to give notice to the Registered Agent! Ensure that name and address is in your contract as well. 

In addition to the these issues the buyer needs to be aware of the default provisions and mutual agreements made in the contract. If there is any provision in any contract that is not clearly understood seek competent legal advice. Notices should be required in the event of any breech of contract or default.

Default provisions should spell out when and how notice is required if such becomes necessary. Notices should always be required to be given by registered or certified mail, return receipt requested, to the address of the party required to be notified. A notice should be made for any demand for the cure of any default. This Notice of Demand should provide a clear explanation of the problem and what is required to solve the problem as well as a time frame for the problem to be cured. A Notice of Default declares that a provision of the agreement has been violated and that procedures will or are being taken to secure the collateral pledged. In an installment contract this usually includes setting aside the contract or voiding the agreement. Make sure that this provision is compliant with state law, as some states have specific procedures for termination of an installment contract.

Other contract provisions or mutual covenants set forth the understandings agreed to between the parties. These contract provisions should address things that can and do go wrong in life. Bankruptcy, death, incapacitation and assignments are common and important provisions to address in your contract. If your seller is a business entity, what happens to your contract if the company is dissolved voluntarily or administratively by state authorities? When will title be shown as being marketable, at the time of executing your contract (which is recommended) or when title is transferred? And how are damages addressed arising from your transaction? A Hold Harmless and Indemnification Agreement is an excellent mutual agreement that can be (should be) incorporated in an installment contract.

The Hold Harmless Agreement is an agreement whereby each party agrees to indemnify (pay or make whole) the other party for any damage, loss, cost, expense and/or even judgments, reasonable attorney fees and costs of collection which arise from or out of your transaction. Such an agreement can be bilateral, effective for both parties or unilateral, with only one party acting in the agreement. Making one party liable under such an agreement can head off any future claims by that party before they begin since any damages at issue may be directed "back at them". Consultation with your legal adviser is Paramount!

One last point concerning contracts signed with a business entity involved. Make sure the closing agent uses the correct acknowledgment for the type of business you are dealing with. When a corporate signature is required, your contract must identify the person having the authority to bind the entity to the contract being made. This is applicable for any contract made in the name of a business entity.

Review the aspects of the installment contract and especially those issues that arise that cause most contracts to fail and never close. Recognize that underwriting is important for both parties and that some contract servicing procedure needs to be in place. Knowing what to look for in performing your due diligence, as a buyer or a seller, will allow you to make better investments. Knowing what to expect and how to prevent problems from arising will allow you as an investor to contract with confidence and limit potential risks. Next, we will explore some marketing aspects of installment contracts and when to use them.

Bill Gulley

American Realty Institute LLC