Paperwork for Owner Financing
In real estate nothing counts unless it is in writing. Even worse, most things won’t count unless the document(s) have been recorded with the county clerk of the county in which the property is located. If your sale or purchase ever develops problems, you are going to wish you had better documentation. I am not an attorney and don’t claim to offer legal advice. However, I have experienced a few situations where a better understanding of the paperwork requirements would have saved money.
The most expensive piece of paper likely to be omitted from a seller financed real estate transaction is Schedule B of a title insurance policy. This is the page that lists exactly who owns the property, discloses if there are any liens, judgments or other problems and guarantees that if there are problems the title company missed, they will pay to have them corrected. It may cost you several thousand dollars if you buy it at the closing. You probably will never use it. However, if your deal turns into one with a title problem it’s going to cost you a lot more.
I’ve “wasted” a lot of money on title insurance over the years, but I would still buy it. I know a few people who REALLY wished they had. I plan to write about their sad stories on my Mobile Home Notes website.
Some guys I know, who have owner financed more than a hundred home sales, provided the following list of terms they have learned to insist be part of their contract.
1. Purchaser must provde Seller with a copy of the insurance showing the Seller as Mortgagor, Mortgage Holder, or an Additional insured before closing. If the house burns down you want to be sure your name is on the check from the insurance company!
2. If the purchasers address changes they must provide their new address to the escrow company as soon as possible. Buyers “forget” to notify others of address changes and then default notices and other legal documents don’t get delivered.
3. Purchaser must take a copy of the recorded contract to the county assessors office and have the property assessed into their name and address within sixty days of closing. This way when the buyer fails to make payments for water, trash or other things the resulting liens attach to the buyer, not the sellers interest.
5. Any and all late fees will be collected along with and at the same time that a regular payment is made. There isn’t much point in having late fees if they get added to the loan balance. They need to be paid when created.
No doubt there, are others, but these are some of the ones they frequently encounter.
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I am considering buying a home through seller financing. The seller is asking for almost 50% down and doing a 10yr term. Is this normal? Should I try and negotiate? Also, do you know of a checklist of items from a buyer’s perspective that I can review? What I am looking for is who is responsible for what and any pitfalls to be aware of. Putting that much down on this house is a bit scary and I want to make sure I am protected just in case.
Thanks!
You are right to be a little concerned. In my experience seller financing is usually used when the buyer doesn’t have enough down and/or credit problems that prevent them from obtaining a conventional loan. If you have 50% down and can handle the payments on a ten year note, you are financially much stronger than most.
Terms are both the strong and the weak point of seller financing. It’s great because the transaction can be structured to meet specific needs. For example, a buyer may have a chunk of money coming from a trust or inheritance. The agreement can state that when that happens an extra payment is due.
I think the most frequent problem is the quality of the paperwork used. Even when there is no intent to defraud, important contingencies are not always covered which makes a mess of things down the road. For example, the seller is often an older man with lots of real estate experience. The buyers may be assured that he is reasonable and changes will be made to the agreement if problems develop. He then dies and suddenly the buyer has to deal with the heirs. They are frequently inexperienced and often have a much higher need/desire for “their” money. Suddenly terms that were not a problem previously become a big deal. If the written agreement doesn’t include them it’s a big problem.
As the buyer in the situation you describe you will want to be absolutely certain you will get clear title to the property when the mortgage is paid. That is where title insurance comes in. The title company (or lawyer in some states) will go through the public records and make sure the seller has the right to sell you the property. For example, are there existing loans to the seller. Is there a wife or ex-wife whose signature needs to be on the documents?
Checklists are hard because there is so much variation between states, counties, and communities as to what is “normal”. The best checklist I can think of only has one item. Find the most experienced real estate attorney you can and hire them represent you. If the seller doesn’t want to deal with them that tells you something.
One thought on negotiating. Why does the seller want/need such a short term. In current times they will get less then 1% interest on their money. The note is probably written at 5-10%. They should be happy to keep their money working at the higher rate for a longer time.
I don’t mean to be negative, and think that seller financing can frequently be a good deal for both buyers and sellers. For that happy outcome both parties must be willing to work a little harder to be sure the transaction is structured and documented properly. A conventional loan transaction is a “one size fits all” with standard terms drafted by teams of lawyers and tested in court. A seller financed transaction is a unique work of art
Good luck with your purchase.
Hi,
I own a business and am interested in buying the building that we currently rent. The owner has shown interest but won’t do any legwork. I want to present him with a package including an amortization schedule. What other forms, documents, etc. should I pull together. Any info would be appreciated.
Thanks,
Seth Musler
I guess a purchase agreement, mortgage, note and some evidence of clear title would be good. I assume you will prepare a variety of amortizations, all of which work for you. By that I mean higher interest rate if you want to shift income/deductions to interest, or lower interest and higher price to do the reverse. Most of the action is coming to a meeting of the minds on terms. The actual documents don’t change much.
I own residential property selling for $259K. A buyer wants to lease\purchase the property for one year, to get their credit solved, then they will obtain their own financing. I contacted a local Texas attorney who says they do not do lease purchase because of strict Texas regulations but an owner finance is much safer. If I owner finance will my current mortgage company want full payment of note. What, if any, document can I use to continue my mortgage and convey property to another party? The buyer and I have discussed terms of 3% down and $2000 per month, which will give us cash up front and an incentive for the buyer to gain conventional lending, with a balloon payoff after one year. And payoff will be reduced by the amount of interest payed on our note. Does this sound like reasonable terms? What are reasonable closing costs and documents? Thanks
Those are all good questions. I have to be a little careful with how I respond because I am not an attorney, and even if I were there are so many state and regional variations the correct answers usually require an experienced local attorney.
Do you think there would be the same objections to a lease/option arrangement? With an option agreement title has not transferred so if they choose not to exercise the option the title to the property remains clear. Since it is a lease, not a sale there shouldn’t be any issue with the mortgage company. (Although with the economy like it is, who knows how the lenders are doing things.) The 3% would be a non-refundable option consideration and you could apply some portion of the lease payments as additional consideration.
Given the uncertainty in our economy I think a one year fuse is to short. You might consider adding some language to the agreements that lets them be extended by mutual agreement, possibly with payment of some additional consideration.
This approach should also be much cheaper initially because you won’t have to provide title insurance until when the option is actually exercised.
I hope this helps.
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