Wrap on a house I'm renovating: deed to me now, or does she keep title until payoff?

Question

Seller owes 118,000 at 3.25 percent on a 1960s ranch that needs about 60,000 of work. She'll wrap at 6.5 percent on a 245,000 price with 25,000 down, 30-year amortization, balloon at seven years. Spread to her is real and she knows it.

Her attorney's first draft is a contract for deed. She keeps title, I take possession and pay, and I get the deed when the note is paid or refinanced. My attorney's draft is the other shape: she deeds the house to me at closing and I give her back a note secured by a recorded deed of trust that wraps her existing loan.

The case for me holding the deed. I'm pulling permits and doing structural work, and the city and my carrier both want to know who owns the building. My money goes into a house I have record title to, which means a lien search finds me and a judgment against her doesn't attach to what I've built. If she dies or gets sued mid-term, my position is on record.

The case for her holding title. Her remedy if I stop paying is faster and cheaper in some states under a contract for deed than a full foreclosure, and that speed is exactly what makes her willing to carry a note to a stranger on a house that's a construction site. She's also less exposed to a transfer showing up in her lender's system, since nothing gets deeded. Some states treat a long contract for deed like a mortgage anyway and make her foreclose regardless, and some require it recorded, so the advantage she thinks she's getting may not exist where the house is. That's a question for a lawyer licensed there.

I've argued myself both directions twice this week. Curious where the room lands and why.

carlos_nunez · Accepted Answer

I've been on the buyer side of both and I'd take the deed, with three conditions attached, and I'd give her most of what she's asking for in exchange.

Why the deed on a rehab. Your permits, your builder's risk policy, and your mechanics lien exposure all run off record ownership. Contractors file against the owner of record. If that's her, you're managing her liens on your project. And the 60,000 you spend is improving a house whose record owner can be sued by someone you've never met, so a judgment lien can land ahead of your unrecorded interest depending on the state.

What you give her instead of title. A recorded deed of trust or mortgage securing the full wrap note, so she has a real security interest and a real foreclosure remedy. A third-party servicer that collects your payment, pays her underlying 3.25 percent loan first, then remits her spread, with statements to both of you. And a completion covenant with a hard date, because her worst case is a half-gutted house she has to take back, not a missed payment.

The honest cost of my preference is that her remedy is slower. In some states a contract for deed forfeiture is much faster than foreclosure, in others courts treat a long contract as a mortgage and she foreclosures anyway, and a lawyer in that state has to tell you which. Also the deed is the transfer, so leaving her underlying loan in place makes the due-on-sale clause live, and how that lender reacts is up to them.

One more thing on the seven-year balloon. If title is in her name, your refinance at year seven starts with her cooperating on a deed. Get that mechanic written now while she wants the deal.

mikeoconnell7 · Answer

Whichever way title goes, somebody has to make sure her 3.25 percent loan gets paid every month before her cut moves. That's the piece I'd nail down first, because the title argument doesn't matter if that payment misses twice.

luis_carrera · Answer

Deed now. Your carrier is going to ask who owns it before they write a policy on a house with open walls, and "I'm the buyer under a contract for deed" gets you a conversation nobody wants during a claim.

hannah_west29 · Answer

What does each option cost in dollars? Transfer tax on the deed at closing is real money in some states and zero in others, and if she keeps title you're deferring it seven years or paying it twice. Nobody in these threads ever prices the choice, they just argue about remedies.

ryanmck27 · Answer

Studying this exact area right now and the thing that surprised me is that recording requirements for a contract for deed differ by state, and in some places an unrecorded one leaves the buyer nearly invisible. @harrow do you know which way your state goes?

marcus_hale41 · Answer

I'd expect her to insist on keeping title and I'd expect her attorney to be right about why. She's handing 60,000 of demolition to someone she met eight weeks ago. But @ledger's question is the one that would decide it for me, and I'd want the answer from a title company in that county rather than from either attorney.

bmoreno23 · Answer

Somebody explain contract for deed to me plainly. Is that the same as rent to own? It sounds like renting with extra steps and I assume I'm missing something.

dpatel_re · Answer

@ember it's a sale with the deed delivered at the end instead of the beginning. You owe the full price, you get the tax bill and the roof, you just don't hold record title until you've paid.

@harrow the underwriting question is who has insurable interest in 60,000 of improvements the day after they're finished. If she holds title and you hold a contract that isn't recorded, you've built equity into someone else's name and your protection is a piece of paper in a drawer. Price that against her faster remedy and I think the deed side wins on the rehab specifically.

megan_doyle15 · Answer

Voted for the state-law option because everything I've read this week ends there.

joe_delgado5 · Answer

I wouldn't put a dollar of rehab money into a house I don't hold title to, full stop. Watched a guy carry a contract for deed through a 40,000 renovation and then spend five months and a lawyer getting the seller's ex-spouse to sign off at payoff. @quarry's version is what I'd do.

samantha_ruiz · Answer

Disagree a little. In my experience the seller who has a 3.25 percent loan and no urgency just says no to deeding it out, and then you don't have a deal to structure. @harrow you may only have the contract for deed on the table whatever the room votes.

Wrap on a house I'm renovating: deed to me now, or does she keep title until payoff?

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