Texas Senate Bill 198! - Posted by Jeff(TX)

Real Estate Investing
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Posted by Eric C on June 17, 2001 at 09:08:34:

Hi Michael -

Perhaps I didn’t make myself clear. I haven’t “used” many CFD’s in years, and none at all since Sept 1, 1995 when the earlier law changes took effect.

That was my personal choice. I know several Texas investors (David Alexander is one)who continued (and continue at this time) to use CFD’s successfully.

I did “purchase” CFD’s that were already in place and convert them to DOT’s as I posted earlier.

Please understand that my comments are directed specifically toward the use of Texas CFD’s. Other states have other regs both good and bad. Knowledge of local laws and requirements are essential in this business.

In New Mexico, the use of a Real Estate Contract, as they call them, is a common way to purchase RE. It often includes third parties such as Escrow companies that also serve to make it (the instrument) a little less biased.

Please note, that most of the changes to the Texas CFD regs are an attempt to correct real or perceived injustices; there have been many of those in the news over the past several years.

Unfortunately, because of the actions of a few, the regs have now been rewritten so drastically that few CFDs will probably be used in the future at all. And clearly, that was the government’s intent.

And it really doesn’t matter what we think about it, right or wrong. Good or bad. It only matters that we understand these changes and adapt to profit from them.

Yours,

Eric C

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Texas Senate Bill 198! - Posted by Jeff(TX)

Posted by Jeff(TX) on June 15, 2001 at 11:04:26:

Its the end of the Contract for Deed in Texas as we know it.
Last night at the Dallas AIREO meeting we learned from our speaker, Bryan Dunklin, that there have been drastic changes in the law regarding Contract for Deed in Texas. Alot of the advantages of using the CFD have been wiped out. Some of those changes include: you must record the CFD within 30 days of being signed; You must give the buyer 60 days to remedy a default; The new law forces the seller to sell the property at auction if the buyer does not remedy the default. Any funds in excess of the amount owed goes to the buyer who defaulted; also, prepayment penalties are not allowed.

The law is effective Sept 1.

See this link for the bill that was signed by Gov. Perry: http://www.capitol.state.tx.us/cgi-bin/tlo/textframe.cmd?LEG=77&SESS=R&CHAMBER=S&BILLTYPE=B&BILLSUFFIX=00198&VERSION=5&TYPE=B

Mr. Dunklin recommended that existing CFDs should be converted to deeds of trust or renegotiated to lease options. This new law comes as a complete shock to me, and will change the way that many of us conduct business.

I am wondering now about how to use a deed of trust in subject-to deals. Is it leagal to get a deed subject-to and then sell using a deed of trust and owner financing? Is there more chance of the lender finding out about the sale if we use a deed of trust? Looks like L/O will be the way to go on subject-to deals in Texas.

If anyone knows of a legal summary of the new law please post it. Alot of people will want to know what is grandfathered and what is not.

Best of luck dealing with this mess,
Jeff(TX)

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Re: Texas Senate Bill 198! - Posted by Eric C

Posted by Eric C on June 15, 2001 at 22:57:00:

Hi Guys -

What’s the big deal?

Many of these changes have been in the wind for quite some time. A lot of changes occurred in the early '90s that affected CFD’s; some were specific (within 200 miles of a border, etc.) while other, less drastic measures took effect state-wide.

My first (somewhat spirited) discussion on this board with David Alexander (almost 2 years ago) was about this very issue.

I’ve been purchasing CFD’s and converting them to DOT’s quite profitably for the past ten years. It’s a good business.

Lately, I’ve even heard that there is state grant money available to assist (pay for) homeowners with the conversion process, but I don’t have any personal experience to back that up.

Change always favors those who can adapt.

It’s not the end of CFD’s. It’s just another rule change in the game we like to play.

Next!

Yours,

Eric C

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sounds like an opportunity to BUY on CfD (NT) - Posted by Anne-ND

Posted by Anne-ND on June 15, 2001 at 17:12:40:

…

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Re: Texas Senate Bill 198! - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on June 15, 2001 at 16:23:16:

Yep, it’s the end of CFDs. Defintely for me. Just finished reading the new law and I don’t believe any educated investor will be using it.

The undue burden placed on sellers is too much to hassle with. I guess, we’ll be doing more L/Os, or regular Deed of Trusts.

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Re: Texas Senate Bill 198! - Posted by Stacy (AZ)

Posted by Stacy (AZ) on June 15, 2001 at 12:16:32:

I don’t know Texas law, but I imagine you can use a deed of trust to wrap underlying loans. It’s called an “All Inclusive Trust Deed,” or AITD. Yes, it will probably need to be recorded, and this will expose the transfer. And, I’d be surprised if you couldn’t wrap a wrap (buy on wrap and sell on a wrap).

I was concerned about this at one time, myself. So, I questioned the experts I knew locally, including the mortgage broker who made me the loan I was about to wrap, and Bronchick. The overall consensus was that lending institutions know about wraps and rarely have a problem with them. They happen every day. Of course, if interest rates climb drastically, all bets are off. I am not concerned now, though.

Yes, it will probably take longer to get a property back in Texas from a buyer that stops paying if you can no longer use CFDs. So, selling on L/Os will probably be a better strategy in most cases (or PACTrusts).

My opinion: Adjusting to the new rules is just a part of being an investor. This won’t be the first time you’ll need to adjust in the next 50 years. I prefer selling on L/O instead of CFD anyway.

Stacy

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Re: Texas Senate Bill 198! - Posted by JohnBoy

Posted by JohnBoy on June 15, 2001 at 11:59:04:

The way I read this means that the buyer must FIRST, make 48 monthly payments OR at least paid 40% or more of the property’s value, THEN, you MUST sell at auction.

26 Sec. 5.066 [5.101]. EQUITY PROTECTION; SALE OF PROPERTY.
6-1 (a) If a purchaser defaults after the purchaser has paid 40
6-2 percent or more of the amount due or the equivalent of 48 monthly
6-3 payments under the executory contract, the seller is granted the
6-4 power to sell, through a trustee designated by the seller, the
6-5 purchaser’s interest in the property as provided by this section.
6-6 The seller may not enforce the remedy of rescission or of
6-7 forfeiture and acceleration.

So the way to AVOID this is to NOT make your contracts for more than 4 years and make sure the buyer doesn’t pay more than 40% of the property’s value between the time you sell and when their contract comes due.

We have a simular law here in IL. To avoid a judicial foreclosure we need to keep our contract for deed LESS than 5 years AND the buyer must have less than 20% equity. Then we can serve notice of default, and if they don’t cure, record the quit claim deed they signed over to be held in escrow and then evict them as a tenant.

IF, the contract is for 5 years or more, AND, the buyer has 20% or more in equity, then we have to foreclose.

This is why we keep our contracts down to two years or less. It avoids this problem, unless of course, property values were to sky rocket to where they increased by 20% within one to two years!

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Re: Texas Senate Bill 198! - Posted by Michael (tejas)

Posted by Michael (tejas) on June 16, 2001 at 24:05:38:

Eric,

Can you tell us about the business of buying CFD and converting them into DOT? Can you give us an example?
Your in Texas? I thought I remembered from an earlier post that you were in Florida.

Michael

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And where… - Posted by David Alexander

Posted by David Alexander on June 15, 2001 at 23:07:34:

there is change and chaos…

There is more money to be made…

If your in Texas and you want to get rid of those pesky contract for deeds due to the new laws…

I BUY CONTRACTS at a reasonable discount… :slight_smile:

David Alexander

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Re: Texas Senate Bill 198! - Posted by Eric C

Posted by Eric C on June 16, 2001 at 23:30:00:

Hi Michael -

I live in Texas.

I think you have me confused with another Eric who does post from Florida.

As far as the business of converting CFD goes, there’s not much to tell.

CFD’s have been popular for many years primarily because the eviction process was far easier to implement ( as a remedy for non-payment)than a foreclosure and because they were inexpensive (usually no realtor fees, no title policy, no attorney fees, etc.)

You can see why they might be popular with property sellers, right?

Anyway, the practice of using CFD’s has been quietly discouraged for several years, and the discouragement became more formal in 1995 when many new regulations took effect. The latest regs simply carry this process of discouragement to greater extremes.

CFD’s (almost) always were less marketable than DOT’s. I say almost because there are people who believe differently. But most institutional investors will agree with me.

What I would do is purchase CFD’s, convert them to DOT’s and sell them (or pledge them) to banks, S&L’s, pension plans, and the like.

The fact that the majority of CFD paperwork is “home made” contributes to the lower valuation. More standardized paperwork is often perceived to offer better protection (in most cases) to all parties.

Each time I had a sizeable portfolio of these, I would package them to move "upstream"and then repeat the process.

This conversation should rightly be on the paper discussion board rather than the main one, but a lot of people don’t realize that there are folks who specialize in “rehabbing” paper just as there are some who rehab houses. Both can be very profitable businesses.

Yours,

Eric C

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Re: And where… - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on June 16, 2001 at 09:23:55:

Is there a reason to get rid of the old ones?

Upon scanning the new law I didn’t see anything retroactive except for some relatviely harmless insurance provisions.

I found enough reason to stop using them in the future though.

Did you see something in the code that might make someone to get rid of the old ones?

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I rest my case… (nt) - Posted by Eric C

Posted by Eric C on June 15, 2001 at 23:20:14:

.

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Re: Texas Senate Bill 198! - Posted by Michael (tejas)

Posted by Michael (tejas) on June 17, 2001 at 07:48:04:

Eric thanks for the info.

Do you still plan to use CFDs after September?

Michael