When it comes to adapting for market survival never, never underestimate the creativity of mortgage and real estate professionals, especially players that are privately held and hate dealing with multiple levels of regulation. Case in point is the re-emergence of “contracts for deed” whereby a home is sold by a private entity to a buyer that doesn’t take out a “real” mortgage but instead contracts to buy the property—eventually.
Generally, the “buyer” makes a small downpayment and the seller retains legal title. Under most cases, the deed cannot be executed for at least the first year. The play is this: someone looking to buy a home or investment property doesn’t have to hassle with the home buying process, credit checks, and all the new rules and regulations driving the mortgage process.
According to Gordon Albrecht, executive vice president of FCI Lender Services, Anaheim Hills, Calif., private contracts for deed “have been scorching the past four months.” Albrecht should know—FCI is the nation’s largest private money servicer of real estate backed loans.
In particular, what’s driving the increased use of private deeds is the foreclosure crisis, he said. “With a contract for deed you don’t need to foreclose,” he said. “It’s an eviction. The use of these is being driven by the long foreclosure timelines we’re seeing.”
Although Albrecht would not identify any of the investors he’s working with in the private deeds market, he hinted that some of the money behind these deals are developers and former homebuilders. (Some are mortgage bankers, too.) “These are guys with 15, 17 years of experience. The have money they want to put to work,” he said.
As for how scorching private deeds are, that’s a different matter. Government agencies and even private data collectors either don’t track the business or have no easy way to count volume. Howard Lax, a real estate and mortgage attorney based in Bloomfield Hills, Mich., notes that no mortgage, per se, is filed in a county court house. “What you do with these is file a memorandum on the land contract,” he said.
For the lender the beauty of these deals is simple: some of the paper on such contracts yields up to 11%. “Those are the numbers we see in Michigan,” said Lax—but he also notes that factored into the yield are a whole host of fees that might include appraisals, title insurance and other items.
It also appears that the private deed market is being driven by investors whose goal is to buy homes on the cheap and rent them out. (Owner-occupants appear to be a small portion of the business.) It’s no secret that traditional mortgage lenders (mortgage bankers, commercial banks and thrifts) have tightened up their investor loan standards, so much so that many would-be landlords don’t even consider going to a bank anymore.
“I know one guy who has 200 houses he rents out,” said Albrecht. “I know another who has 335 houses. Over the next five to eight years we are going to have tons of renters.”
The beauty of these deals, according to Ben Ramos, a loan broker based in Southern California, is the ability of the borrower to purchase a house (although at a high note rate) because a Realtor may not be involved. “Most people do not realize that in real estate, just about anything can be negotiated and agreed upon by two parties,” he said.
But players in the market aren’t blind to the risks either. Usury laws on how much interest they can charge apply. (Usually it’s tied to a certain amount of basis points over the prime rate—but only for lenders that make more than five loans a year.)
Also, the “buyer” entering into the private deed has little in the way of property rights. Perry Hamilton, a private money lender based in Hilton Head, S.C., described such an arrangement as “predatory in nature,” noting that a default on a contract “cancels the deal and gives the seller back the real estate with no equity (or equity of redemption) for the buyer.”
