Contract for Deed Bank Problems, Payments and Appraisals

Jun.22, 2009 in contract for deeds, short sales

Here are the two most common problems I hear of people having these days that have bought or sold a Minnesota Contract for Deed within the last 7 years, since about 2002. Buyer’s have watched the seller collect the payments every month from them for the Contract for Deed, but the seller isn’t making the mortgage payments to the bank. The second most common problem I am hearing is that the house will not appraise for the amount the Contract for Deed contract and purchase price specified. In both cases we have a problem that needs to be solved, and this article is being written to help you with the solution.

In the first case where the seller isn’t making the payments to the bank, we will soon see that the owner will get a notice of default, the house will soon be in foreclosure in the state of Minnesota, and it will become a problem for both parties. The first thing you’ll need to do is check with a real estate attorney and discuss if this is more of a civil act than a criminal act being that monies are involved. The reason the seller gets into this situation could be a number of reasons such as they believe they have no more equity in the house and owe too much on the house, the seller’s ARM adjusted and the payment the contract for deed buyer is paying doesn’t cover all of the PITI(A) Principle Interest Taxes, Insurance and possible Association expenses. If either of these are the case, or in combination the seller will lose his/her incentive to keep making the payments whether right or wrong. This is not fair to the buyer who has put their time, hard work, and money into this property for months, if not years. Additional problems that a buyer should be aware of, is that the seller may have recently lost their job, or had setbacks due to family health problems. Another thing to notice is if the seller recently been divorced, (remember both signatures from the seller will be needed with the transfer of the deed someday if they were married). With a recorded contract for deed remember that the seller is probably going to have a tough time with their own lender when it comes to refinancing, pulling out cash on a Refi, doing a HELOC, or probably even a loan mortgage modification if they just want to set in better rates/terms that are more advantageous to the seller of the contract for deed.

You should seek legal advice on how to handle this situation, if the seller is letting the house go back to the bank, and you still want to buy the house, but not try to buy the house after the bank gets it back as a bank owned listing, then you may want to have the seller call us and talk to us about a possible short sale of the property. If you, as the buyer, are not able to get financing for the current price, but could possibly get a lesser amount financed today. As the buyer you will still need to meet with an attorney on the proper way to handle the contract for deed and what it specified as the way to handle the transaction whether deciding to move forward or cancel. Often the buyer can refinance the property at this point in the timeline if they are approved for financing with a lender on a contract for deed, so the buyer should hurry with that timeline, but the appraisal price may still come into play, which leaves us to situation #2.

The second scenario, is when the house won’t appraise because it was most likely purchased in the past 7 years after 2002, and the seller likely owes too much on the house and it’s likely that the Contract for Deed was written at a price that the house will unlikely sell, or appraise for in today’s market. The buyer originally agreed to buy the house for that price, and a contract was written, and the seller may wish to get the buyer to perform on that contract, you should check with an attorney on this on how to handle this. Please keep in mind that it’s very common these days that when the buyer tries to purchase the house the bank will say that it appraised for “x” amount. At this point there is a bit of a problem, the bank is only going to lend likely 80-97% of that appraised amount determined by the buyer’s financing program. The lender would probably allow you to buy the house for more, but the buyer would have to come up with the difference in cash from the lenders appraisal and the original purchase price, I don’t know any buyers that want to do that. The seller wants to still sell the house, and knows if somehow that buyer didn’t buy, the seller would have to market the house for months, re-list the house on the market and try to sell the house themselves, only to find themselves in the same position many months later where the next buyer’s lender says that the appraisal is a similar amount. At this point the seller may choose to call us and do a short sale, and have our company negotiate it for him/her as it may be efficient to just have that buyer buy the house for a lesser price. A price we could negotiate with the bank. The seller can talk to their accountant or CPA as to how the tax rules apply to these transactions. We’ve already established there is a problem of owing too much on the house, as you can see we are the solution to that problem, it’s just our job with this article to help you realize the many scenarios in real estate and housing where this occurs. Call us whether the house is about to be behind in payments, has just received the Notice of Default, has a scheduled Sheriff Sale or just recently had a Sheriff Sale, we want to hear from you.

www.wecallyourbank.com