Contract for deed or deed now with a recorded lien, when you are the bank on rural acreage

I voted deed at closing, and the reason is entirely about the exit. Every time I've asked someone who buys installment paper what they'd rather see, the answer has been a note and a recorded lien. Contract for deed paper gets bought too, at a wider discount, and sometimes with a request that you convert it first. If you never plan to sell a note that doesn't matter. I don't know yet whether I'd want to sell, so I'd rather not build a portfolio I have to rebuild.

Basic mechanics question since I'm on the outside of this. In the contract for deed version, does anything get recorded at closing, or is the whole arrangement invisible in the county records until payoff? I ask because if nothing is recorded, I don't understand what stops the seller from encumbering the parcel while the buyer is paying.

@beacon in many states the contract or a memorandum of it can be recorded, and in some it has to be. That's exactly the kind of item that differs state to state, along with whether the buyer gets a statutory cure period and whether a forfeiture is available at all after a certain amount has been paid. I've read three operator write-ups that contradicted each other and all three were probably right about their own state.

@verity the framing I'd add is that you're not really choosing between two documents. You're choosing which state's process you want to be standing in on the bad day, and that means the answer starts with a local real estate attorney reading your form. I'd pay for that once and reuse it fifty times.

Watching how private money prices these, the discount on land contract paper is real but smaller than people say when the payment history is long and the down payment wasn't token.

I've closed both. Sixteen terms sales in the last three years, twelve on contract, four with a deed and deed of trust.

The contract sales that defaulted early were genuinely cheap to unwind. Two buyers stopped in months four and six, I sent the notices my attorney drafted, they didn't cure, both signed a release rather than fight and I resold within ninety days at a higher price because the parcels showed better with a mowed trail by then. Total legal cost under $1,200 for both.

The one that hurt was a buyer four years in on a 96 month contract who had paid about 42% of the balance and then stopped. Forfeiting that felt indefensible and I was told it probably wouldn't hold in my state, so I ended up giving him a payoff discount to walk away clean. Cost me around $6,000 of expected interest. So my split now is contract under about $25,000, deed and lien above it. That's option four and I got there by losing money, not by reasoning.

@quarry the 42% number is the one that makes me nervous. Do you disclose to your buyers up front what happens at 40% paid versus 10% paid, or is that a conversation nobody has until it goes wrong?

One thing I'd flag from the licensing side of my reading: doing a handful of seller-financed sales a year is treated differently in different states, and repeatedly originating consumer-purpose financing can pull you into rules you didn't plan for. Raw recreational land often sits outside the consumer mortgage rules, and often isn't the same as always. If your buyer is putting a cabin on it and living there, ask an attorney where the line is in that state before you write the tenth contract. Not the first one, the tenth, because volume is usually what trips the trigger.

Nobody has said anything about the tax bill yet, which is where I've seen the most avoidable damage.

Under a contract for deed you're still the owner of record in most counties, so the treasurer sends the bill to you. If your contract makes the buyer responsible for taxes and you don't collect them monthly, you find out in year two that three years of bills went unpaid and a tax certificate got sold on a parcel you still hold title to. I read one operator's contract where the buyer paid taxes directly, and the seller had no verification step written in at all.

Under a deed and mortgage the bill goes to the buyer, which sounds cleaner, except now a delinquency can produce a tax lien ahead of your mortgage and you don't hear about it unless you subscribe to a monitoring service or check the treasurer's site yourself once a year. Either structure works. Neither works if you don't have a written mechanism for confirming taxes got paid.

@fathom that's the first thing in this thread I can put in a model. Which raises my actual question: how do people model default recovery at all? I've been trying to build a terms sale underwrite and I keep just guessing a 15% default rate and a 6 month recovery. Both numbers are made up.

@windlass stop modeling a default rate and model a default outcome, because on a resale the recovery is often positive.

Rough example on a parcel I'd underwrite at $12,000 cost, sold at $32,000 with $3,000 down, 96 months, 10%. Payment lands near $440. If the buyer quits at month 8, I've collected $3,000 down plus about $3,520, minus maybe $900 of unwind cost and two years of taxes at $200. Call it $5,220 net against a parcel I still control. Resell at $32,000 again and the first buyer improved my return. The scenario that actually hurts is @quarry's, a buyer deep in with equity, because there my choices are a discounted payoff or a fight, and both cost real money.

So the number I'd want is not default frequency. It's the distribution of when defaults happen. My own tiny sample says early, but 31 contracts is not a dataset.

@sextant your example assumes you can resell at the same $32,000 and that the parcel comes back in the shape it left. I've seen one come back with a half-finished pad, a dead well casing and someone's abandoned camper on it, and the cleanup was $4,100. Your $900 unwind cost is doing a lot of work in that math. If I ran your numbers with a 30% chance of a $4,000 cleanup and a 15% haircut on the resale, the early default stops looking like a gift and starts looking like a wash.

This is the first thread where the document choice finally made sense to me. What I still don't get is the buyer's side. Does a buyer on a contract for deed know they don't hold the deed? Or does it come as a surprise later?

@pike they know, because it's in the document in plain language, and some of them don't care at all. That's the part people miss. A buyer paying $3,000 down for 20 acres to hunt on is not thinking about title theory.

Where it bites is price point. Above roughly $60,000 in my market the buyers start being people who've financed a house before, and those buyers ask why they don't get a deed, then they ask their brother-in-law who's an agent, and the deal slows down or dies. That ceiling is why I moved to deed and deed of trust on anything over $50k. It's a marketing decision as much as a legal one.

Small operational note since I run the back office side of a service business. Whichever you pick, decide early whether payments come to you or to a licensed third-party servicer, because switching later means new payment instructions to every buyer and you will lose two of them to confusion. Servicers I've looked at handle both structures, they just charge a setup fee per contract and want the documents in a specific order.

Trades angle nobody's raised. If your buyer wants a permit for a septic system or a pole barn, the county building department is going to ask for proof of ownership. In two counties I've worked in, a recorded memorandum of contract satisfied them and in one the clerk wanted a deed. If you're selling to people who intend to build, the deed-at-closing version saves you phone calls you'd rather not be on.

@solder that's a good practical filter. Recreation buyer, contract is fine. Building buyer, give them the deed.

This reads a lot like the lease option arguments on the rental side, right down to the part where the seller thinks they have a fast remedy and then a judge treats the buyer as an owner with equity. The pattern I've watched is that the more the buyer has paid and the longer they've been in possession, the less the label on the paperwork protects you. Not a legal opinion, just what I've seen play out twice.

In one sentence, what does the buyer actually own during the contract for deed period?

@compass possession and equitable title, which in most states means the right to get legal title by finishing the payments, and a claim a court will usually protect if you try to strip it after they've paid a lot. Legal title stays with the seller until the last payment. That's the general shape and the details are state law, so treat mine as vocabulary rather than a ruling.

@verity to your actual question. I've done long-hold land more than terms sales, but the thing I'd weigh is who else has to read your paperwork over the next eight years. A county treasurer, maybe a title company at payoff, possibly a note buyer, possibly a probate court if your buyer dies mid-contract. Every one of those readers finds a recorded deed and a recorded lien easier than an unrecorded contract. That's why I voted option two even though I think @quarry's cost numbers on early defaults are correct.

Payoff question, since I make decisions slowly and want to know what the end looks like. On a contract for deed eight years out, who prepares and records the deed, and what happens if I've moved, changed entities twice, or died? On a mortgage the release seems like a simpler document to get signed by whoever is holding the file by then.

I want the version with the fewest phone calls. Reading this thread, that sounds like a deed at closing plus a servicer, and I accept I'll make a bit less. Am I wrong about that?

I had to read @parcel's post twice to get equitable title, and I think I have it now. Thank you for using the actual words instead of around them.

@marlow you're not wrong about the calls. At 30 or so accounts the admin difference is what I'd weigh most. I hold a mix and the contract accounts generate more of my questions, mostly tax bills arriving at my address and buyers wanting to know why the county has my name on the parcel. The mortgage accounts mostly just pay.

Voted option two. My reason is a contract I inherited when I bought a small package of paper years ago. Buyer was in year six of ten, had paid roughly 60%, then stopped after a divorce. The forfeiture language in that contract was aggressive and my attorney's read was that it would not survive a challenge in that state. We settled at a discounted payoff funded by his brother and I still made money, but the six months of uncertainty was worth more to me than the interest spread I gave up.

Patience is fine as a strategy. Patience while waiting on a court is a different thing.

@parcel that's it, thank you. And @orchard's story is the version I'll remember, because the paperwork advantage only shows up in the year the buyer's life goes sideways.

@ledger fair on the cleanup, I'll widen that input. Running your version, 30% chance of $4,000 cleanup and a 15% resale haircut, my early-default case goes from a $5,220 net gain to roughly break-even after the second sale closes, and the whole edge moves into the interest I collect on buyers who pay. Which straightforwardly means the underwrite has to work on the cash price alone before I add a single month of interest to it.

@orchard's case is the one I'd size hardest. Late default with heavy buyer equity is where the structure decides the outcome, and everything upstream of that is just marketing preference.