LOUISIANA BOND FOR DEED TRANSACTIONS
Louisiana commercial property title transfers are normally more complex than residential transactions.
A Bond for Deed (BFD) transaction is a Louisiana real estate contract in which the purchase price is paid in installments, and a title is transferred after the payments are made in full. The crucial thing about Bond for Deed is that only the buyer and seller need to agree on the terms of the deal. The parties do not have to pay for appraisals, origination fees, or points.
WHAT IS A BOND FOR DEED CONTRACT?
A Bond for Deed (BFD) is defined as a contractual agreement to sell real estate property in which the purchase price is to be paid by the buyer to the seller in installments, and in which the seller agrees to deliver the title to the buyer after payment of a stipulated sum. This process is very similar to what some other states call a conditional sale, contract for deed, or land contract.
Another way to explain the process is that the seller finances the purchase but ultimately transfers the title after all payments have been made on it, holding the BFD contract as a lien against the property. These agreements are often used for Louisiana homes that are otherwise difficult to sell or finance.
What is a Bond for Title?
Bond for title is another term for bond for deed. Under a bond for title, seller retains legal title until the buyer pays previously arranged price on the real estate property.
How does a Bond for Deed work?
A bond for deed is a contract specific to Louisiana real estate transactions. Below is a list of essential points you should be aware of when it comes to the bond for deed:
- First, all terms are completely negotiable between the seller and the purchaser.
- Next, no third-party requirements are needed to close the contract.
- Appraisals and inspections are optional at seller’s and buyer’s discretion.
- There are no debt ratio or income ratio tests involved.
- Also, there are requirements related to the loan to value.
- Finally, the interest rate is set by the seller and purchaser.
How are Bond for Deed Contracts serviced?
Collecting payments from buyers and maintaining accurate, objective accounts is not something that most bond for deed sellers consider until they are ready to transfer title during a closing. Southern Title, Inc. is proudly affiliated with Southern Loan Servicing, the state’s largest bond for deed servicing company and one of only eleven state-licensed escrow agents in Louisiana.
They will answer all your questions about the bond for deed transaction process and provide around the clock (24/7) online account access after the closing of a property purchase. Existing bond for deed account holders may contact Southern Loan Servicing anytime day or night, to access their account.
The importance of using a reputable service to maintain the integrity of the payment accounts cannot be over-stressed. Errors here can lead to lawsuits or mistrust between the parties.
What happens if a buyer defaults on the Contract?
The seller must first give the buyer a mandatory 45-days prior notice via registered or certified mail of his intent to cancel if all amounts due have not been paid before canceling the BFD contract by the proper legal registry. Also, the seller must be aware that if the purchaser defaults on their obligations under the BFD contract, they will often have to pay approximately two months of mortgage payments to bring their mortgage current.
In a situation where a buyer defaults after placing a large cash payment at the closing, it is possible that the seller may have to reimburse the purchaser some of that money. While it is possible that a buyer who was near default on their Louisiana bond for deed contract would damage or vandalize the property before they were evicted, in our experience, this is an extremely rare occurrence. Sometimes the purchaser has in fact improved the property, even when facing default.
The first issue to be aware of are the laws pertaining to due-on-sale provisions and their effects on a BFD contract. A bond for deed may trigger a due on sale clause, meaning the mortgage lien holder can demand payment in full.
Bond for Deed vs Owner Financing
People often get confused when it comes to these two terms. Bond for Deed is one type of owner financing, but there are others, such as a credit sale.
The bond for deed requires the buyer to make all payments before the title transfers, while a credit sale transfers title at closing. And while a bond for deed is a type of owner financing, the difference between the two lies in the fact that during the period while the purchaser makes payments to the seller, the seller retains full legal rights and legal title to the property but transfers the physical possession to the buyer, while the buyer can make improvements on the house and live in it.
Traditional owner financing and a bond for deed are quite similar, but with a BFD, the deed and title are often placed in third-party escrow so as to protect the parties’ interests.
A bond for deed agreement is riskier for the buyer since default results in repossession without reimbursement. On the other hand, owner-financing can take longer, but the contract can also be developed to provide better protection to the buyer, not just the seller.
WHEN TO USE A BOND FOR DEED CONTRACT?
A BFD contract can be used in all real estate transactions. It is also used extensively when an owner is owner-financing the transaction. Parties can be very creative with the use of wrap-around or balloon clauses. Some even have the seller and the buyer both making mortgage payments when the property sells for less than the existing mortgage.
Below are some common situations when a Bond for Deed can be used.
In the case of owner financing
Whenever the seller will finance all or a part of the sales price. With a bond for deed, it is much less costly to cancel a contract for non-payment than with a foreclosure.
When the purchaser or property doesn't qualify for a traditional mortgage
A number of would-be purchasers simply cannot qualify for a new mortgage. In other cases, the property doesn’t qualify. With a bond for deed, the terms are set by the seller and purchaser alone.
No down payment
If the seller requires a material down payment, but the buyer does not have the cash available to make a down payment, then a BFD makes sense. The BFD protects the seller’s interest in the property while still allowing the buyer to acquire it on terms that the seller agrees to.
Lower closing costs
When you use a bond for deed contract to buy or sell property under, you don’t need to cover various costs such as private mortgage insurance (PMI), appraisal and survey fees, or for repairs required by a mortgage company before it makes a loan.
When mortgage is not assumable
Based on court decisions, permission of the mortgage company is not required and anyone can make the payments of an existing mortgage unless a bond for deed is specifically prohibited by the mortgage.
Assumable mortgage
If, under the assumable mortgage, the mortgage company will not give the seller a written “release of liability”, a bond for deed is a good choice. In case the seller still has mortgage liability, they should retain the title so as to prevent credit problems that can arise if the person that “assumed the loan” does not pay.
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PROS AND CONS OF USING BOND FOR DEED
Besides allowing the buyer and seller to work out an arrangement much faster and with more flexibility than with a standard bank loan, there are many other important considerations. To help you figure out whether this is the best solution for your real estate transaction, here are some benefits and drawbacks of a bond for deed contract.
Pros for the BUYER
- A great (and often only) opportunity for buyers without traditional financing options.
- Lower closing costs and better interest terms compared to conventional financing.
- The purchaser can deduct any interest portion of their payments on their federal income taxes since the IRS sees a bond for deed as a sale.
- No lender approval is required and there is no need for an appraisal.
- Everyone qualifies to buy a home as long as the seller agrees to use a bond for deed contract to sell the property.
- Past bankruptcy or other credit problems will not prevent a sale. In other words, those with less than perfect credit can use a BFD to buy property.
- A purchaser in a BFD contract is building equity in the property they are purchasing. Since a personal residence is often the single largest source of wealth for Louisiana households, this equity can be the key to moving into financial security.
- In many cases, a BFD purchaser is someone who has never owned a home prior to this transaction and would not have been able to acquire the financing to purchase a home in a conventional manner.
- Once the purchaser is a property owner and not merely a renter, he has the option to sell as long as he can pay the sums due under the terms of the bond for deed.
Cons for the BUYER
- Purchasers cannot use their properties as collateral for home equity or other loans since they don’t have full, legal title to them.
- If a buyer defaults, a bond for deed can be foreclosed or forfeited, which is often a very short process and in some states easier to implement than a foreclosure of traditional mortgage loans.
- There is a possibility (though it’s highly unlikely) that the seller won’t deliver the deed once the property is completely paid off. This may happen because of different reasons, like disability, death, different title problems, or even dispute over payment history.
- In some cases, the seller may be dishonest or a divorced couple may disagree on financial matters.
- Finally, the seller may not make underlying tax or insurance payments. This is why it is crucial to use an independent and experienced bond for deed servicing company.
Pros for the SELLER
- The seller can get a better price for the property than an appraiser might estimate, gaining the ability to sell property in poor physical condition to a buyer willing to improve it.
- Peace of mind knowing that the property’s title will not officially transfer until all payments have been made.
- If a buyer defaults on their obligations, the seller can quickly and cheaply reclaim their property – in 45 days. This is significantly faster than to foreclose on a credit sale or other form of mortgage. It is also much cheaper than going to a sheriff’s sale.
- A seller can report their transactions as installment sales on IRS form 6252.
- They can pay taxes on capital gains or profit over the years of the contract rather than all at once.
- Wider pool of available buyers and better chances of a sale.
- The seller can sell the property for whatever the buyer is willing to pay. The seller can also add other terms, such as the balloon payment after a specified term.
Cons for the SELLER
- If the purchaser defaults on their obligations under the BFD contract, they will need to come up with approximately two months of mortgage payments to bring their mortgage current.
- Sellers do not receive their sale proceeds all at once, but rather over many years.
- They cannot claim depreciation, property tax deductions, and similar benefits.
- In the case of a current mortgage on a home that is sold using a contract for deed, the seller may violate their loan’s due-on-sale clause, which allows the lender to call the loan in.
- Generally speaking, contract for deed homes which are repossessed by their sellers can suffer depreciation as well as loss of value.
- The biggest potential hazard to the seller is that the purchaser may not make their payments on time, and this may affect the seller’s credit rating. The sellers can, of course, make the payment themselves in order to prevent it from becoming late.
- More information about seller concerns can be found in the section what happens if the purchaser defaults?
KEY THINGS TO REMEMBER ABOUT BOND FOR DEED
- In order to protect the rights of both parties, the BFD contract is recorded in both the Mortgage and Conveyance records in the Parish's Clerk of Court's office.
- Once the bond for deed contract has been closed, the buyer is responsible for repairs, maintenance, insurance, and so on.
- Property insurance should be carried in the owner's name, while the purchasers are to be listed as additional insurers. Also, title insurance should be used to ensure the title validity.
- It is important to note that, for tax purposes, the IRS considers a BFD the same as an installment sale.
- The buyer is protected by the Bankruptcy Code in case the seller files a bankruptcy action.
- Should a seller or purchaser die, this does not affect the validity of a bond for deed, since a BFD is a "heritable" contract under Louisiana Civil Code. Therefore, the heirs inherit the benefits and the obligations of the bond.
- Under a BFD, mortgage lenders qualify mortgages to buyers as refinances rather than new purchase loans. Payments to escrow are considered as mortgage payments paid to an independent third party by mortgage loan underwriters.
BOND FOR DEED SERVICES IN LOUISIANA
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