We make a loan on a property and our borrower is already acting as a seller and has entered into a "contract for deed" with a third party to buy the property. If we have to foreclose, does the third party buyer under the contract for deed have any rights or recourse against the bank? Is this a state specific issue? Thanks in advance for your insights!

First, I'm not an attorney. I don't believe the third party has rights to title until the contract for deed is paid in full or a specified number of payments are made. If they are not an owner, I assume they are a tenant. Certainly they are an interested one who may be interested in buying the property. If not, they may need information from the bank as to where to send payments and their status as to residency.

This is a touchy area and our state statutes don’t cover this. I would classify this is a contract law issue that should be addressed by your attorney.

We will not knowingly enter into such a loan. Our reasoning is that if we do have to foreclose and the people buying through the contract loses what they think is going to become their home they possibly could come back on the bank (deep pockets) with a claim that we were aware that the home was in “jeopardy” and we did nothing to advise them they were in danger of losing their home.

If we do make such a loan, we only do it with the acknowledgement of all parties involved and if the borrower will not give us permission to contact the people on the contract we send them down the street.

I agree that it may differ from state to state. Texas recently made some changes here. Under the old rules the buyer under the contract for deed could lose all the money they had put into the loan with the seller if they defaulted. Now there is a time limit, I think its 25% of the term or 48 months, under which they get money back. They also now have to get annual statements reflecting the money paid, balance and such. Failure to do this can be a $250 a day fine.

As a lender, the only time I was involved in such a deal was when a distressed borrower was selling off lots on which he put mobile homes. As a consumer, I wouldn't borrow this way. As first in line, we saw it as an avenue to get paid instead of land we didn't want in OREO. The deal worked.