Seller Financing Options
Seller financing is an important and popular tool that can be used to get buyers into properties they could not otherwise purchase. Sellers are sometimes willing to be the bank for a buyer, taking payments just as the bank would until the loan is paid in full. The deed is transferred into your name as it is with any purchase, and you simply make your payments to the seller instead of a bank.
If the seller finances the entire purchase price, a bank won't be involved at all, so you won't have an underwriting department to critique the property — deciding if it's a good buy is entirely up to you. Order an appraisal, and perform all inspections required to help you determine the condition of the structure.
Sellers might check your credit reports, but qualification for a seller-financed loan is usually easier than getting a bank to finance you, especially if you already own many investment properties. You can usually buy a seller-financed property with better terms than a bank can offer for investment properties — at lower interest rates and less money down.
It's not unusual for a seller to ask for a balloon note, but you can usually negotiate to allow a healthy period of time before the note is due. If you plan to refurbish and sell the property, make sure there's enough time to get both tasks handled before the deadline. If you're keeping the property for a rental, make sure you can access payoff funds by the time the due date comes around.
You can usually go to closing very quickly with a seller finance package, but slow down long enough to consult with a real-estate attorney about your offer to purchase and the seller financing agreement.
Contract for Deed
“Contract for deed” is a special type of seller financing. For this type of purchase, the deed remains in the seller's name as security for the debt. The buyer takes possession of the property and maintains it as any owner would, paying taxes, insurance, and maintenance costs. When the debt is paid, the deed is turned over to the buyer.
Contract for deed is sometimes used in order to get around the due-on-sale clause contained in the seller's existing mortgage. That clause states that if the deed changes hands, the mortgage must be immediately paid in full.
Financing issues apply to many aspects of a real-estate transaction. You'll find more information about the various aspects of real-estate finance throughout this book, discussed in the chapter that's most related to each topic.
Since the contract for deed is an agreement between individuals, it requires little or no entry in public records. Before you choose this option, your real-estate attorney should study the seller's existing loan documents to find out if a due-on-sale clause exists.
Before You Sign the Agreement
There are risks that you should evaluate before you accept a contract-for-deed agreement. If the seller has a mortgage, you must make provisions to ensure that he continues to make the loan payments. If he doesn't, the original bank can foreclose and take the property back — even if you've been making timely payments to the seller. You must also be able to prevent the seller from placing future liens on the property, such as acquiring a home-equity loan.
The contract must clearly outline your rights if for some reason you cannot continue to pay the loan. How will foreclosure be handled? Will you be given time to sell the property? Always consult a real-estate attorney before signing a contract-for-deed agreement.
