Register Real Estate Advisors

Seller Financing is when the seller is the lender.  I works like this – the seller passes ownership of the property to the buyer by deed. The deed describes whatever matters affect the ownership (or title) to the property and contains a promise by the seller to defend the buyer’s ownership (or title) to the property.  The seller gets a note for the difference between the sales price and cash paid by the buyer; this is money owed to the seller. The note generally provides for equal payments of principal (what is required to pay off the amount owed/borrowed over the time provided for repayment) and interest (the extra amount paid, as profit to the seller/lender, for having provided the money). Because of the interest, a note is a type of investment (a way the seller/lender can make money).  The property becomes the security for the note: the seller/lender gets the property back if the buyer does not pay the note as agreed.  The mechanism used to make the property security for the note is a document called the “deed of trust.” This document creates a lien against the property. When the note is paid in full, the seller/lender releases his lien, and the buyer owns the property “free and clear” of the lien. If the note is not paid as agreed, the seller/lender can recover ownership of the property by foreclosing on his lien.

Here are some negotiable points when using seller financing:
• Typically, the buyer pays taxes and insurance. The seller/lender can decide to collect the money to pay these items along with the monthly payment on the note (collecting 1/12th of what will be due and paying the tax or insurance premium when it becomes due) or to allow the buyer to pay these items directly and provide proof of payment. The appropriate provision must be put in the deed of trust.
• If the buyer is late in making the monthly payments due the seller/lender, a late charge (typically 5% of the payment amount if the payment is made more than ten days after it is due) can be collected by the seller/lender along with the payment. The appropriate provision must be put in the note.
• If the buyer wants to pay off the note early, before the scheduled payoff date, the seller/lender, who will not receive all of the interest he would have received over the full term of the note, can charge a prepayment penalty. However, the prepayment penalty cannot exceed the amount of interest the seller/lender would have earned if the note had been paid as scheduled.
• In the event that the buyer wants to sell the property before the note is paid in full, the seller/lender must decide whether he will allow the note to be assumed by a new buyer or require that the note be paid off at the time the buyer sells the property. The appropriate provision must be put in the deed of trust.
o If the seller/lender allows the note to be assumed, there is a requirement that the seller/lender be satisfied regarding the new buyer’s credit and ability to repay the note. The seller/lender must also decide whether the original buyer will remain liable to pay the note or will be released from liability to pay the note.
o If the seller/lender requires that the note be paid off, then a “due on sale clause” is put in the deed of trust.
• If the deed of trust contains a “due on sale clause” and the buyer sells the property without paying the note to the seller/lender, the seller/lender can get ownership of the property back by foreclosing on his lien.
• Prior to the foreclosure process, the buyer would be given certain notices. If the buyer fails to pay what is owed, the property is sold at a public auction to the highest bidder.
o If the property is the principal residence of the buyer, then the buyer must be given a warning notice that the payment under the note is delinquent. The buyer is given 20 days from the date of the sending of the notice to pay what is currently owed. (If the property is not the buyer’s principal residence, then this notice does not have to be given.)
o If the buyer does not pay the delinquent amount in full, then the seller/lender can “accelerate the note”; the seller/lender can say that all money due under the note (whatever is required to pay the note in full) is due. A notice that the note has been accelerated is sent to the buyer.
o A Notice of Foreclosure Sale is filed with the County Clerk and put up (posted) at the place in the county provided for public notice of foreclosure. The Notice of Foreclosure Sale is also sent to the buyer, usually with the notice that the note has been accelerated.
o Foreclosure sales are held on the first Tuesday of each month. The Notice of Foreclosure Sale must give the buyer at least 21 days to pay everything that is due on the note. Therefore, the foreclosure sale will be held on the first Tuesday of the month that occurs more than 21 days after the Notice of Foreclosure is sent.
o The foreclosure process is generally conducted by the Trustee under the deed of trust. If a foreclosure sale does occur, the Trustee takes bids from all interested parties. Usually the seller/lender bids the full amount owed on his note, and usually the seller/lender is the successful bidder. If someone else bids more, that person has to pay cash for the property, and the seller/lender’s note gets paid off.
o The Trustee conveys the property to the successful bidder at the foreclosure sale, and the buyer loses ownership to the property.
• There are two (2) situations which can interfere with the foreclosure process:
o The buyer can file bankruptcy. In this situation, the seller/lender will either be allowed to foreclose, but under the timing allowed in the bankruptcy proceeding, or the note will be paid off in accordance with a plan developed in the bankruptcy proceeding.
o The buyer can die. In this situation, the seller/lender can foreclose after a probate proceeding on the buyer has been started or after the seller/lender can identify the buyer’s heirs-at-law.
• Lender’s title insurance (loan policy). The seller/lender should get a loan policy that insures the lien created by his deed of trust.
o The loan policy protects the seller/lender against title defects, but is particularly useful if the seller/lender wants to sell the note and get cash, rather than waiting for the note to be paid off.
o If obtained at the same time as the owner policy to the buyer, the loan policy only costs an extra $100 plus endorsements. If obtained later, a credit may be given, but the charge will not be as minimal as it would have been if the loan policy was obtained at the same time as the owner policy to the buyer.

Want to know more about Contract for Deed?

Below is the process:
1. The seller and buyer execute a document called a Contract for Deed. By law, the document must be recorded in the real property records of the county.

2. The document provides that the seller/lender does not provide a deed to the buyer until the purchase price for the property is paid in full. The payment of the purchase price is similar to payments on a note, and the payment schedule is set out in the Contract for Deed.
3. If the buyer does not make the payments set out in the Contract for Deed, the seller/lender can take possession of the property.
a. If the buyer has paid less than 48 payments or less that 40% of the purchase price on the Contract for Deed, he is given a notice of delinquency. If he does not pay the delinquency within 30 days, the seller/lender can cancel the Contract for Deed, take possession of the property, and record a notice canceling the Contract for Deed in the real property records of the county.
b. If the buyer has paid more than 48 payments or more than 40% of the purchase price on the Contract for Deed, he is given a notice of delinquency. If he does not pay the delinquency within 60 days, the seller/lender can foreclose in the same way that a deed of trust would be foreclosed.

Some considerations:
• The risk to the buyer is that the seller/lender may do something to affect the title before the buyer can pay off the purchase price and get the deed from the seller/lender. Recording the Contract for Deed protects the buyer against any creditors of the seller/lender that have rights arising after the date that the Contract for Deed is recorded.
• The Contract for Deed is often used when the buyer does not qualify for a loan at the time of sale but expects to obtain a loan in the foreseeable future.
• Title insurance may be issued on a Contract for Deed transaction. Only an Owner Policy is issued (because there is no note and lien, just a contract for the buyer to pay money and the seller/lender to convey title sometime in the future). The insureds under the policy are both the seller and the buyer.
• A real estate commission can be collected on a Contract for Deed transaction.

Don’t do it!  There are many reasons why I recommend seller financing over rent to own in Texas.

If a buyer does not have adequate funds for a down payment and has poor enough credit or income to keep a lender from offering them a loan, I don’t think they should be purchasing a home.  If they do have the income or the down payment, regardless of credit, then seller financing is a great option for them.  I don’t believe a landlord should offer to sell to someone that has poor credit, limited down payment, and unsteady employment.  That sounds like trouble to me – so I would never recommend this to one of my landlords or sellers.

If a tenant needs more time to get adequate financing, then I feel they should  purcahse a home at a later date – that is my opinion.  What if they are never able to get their credit in better shape and now the seller/landlord has agreed to sell their house to this renter?

It doesn’t help that ForSaleByOwner.com is now offering a lease to own advanced search option.  Other states that have different real estate laws, may be more suitable for rent to own tenants than Texas.

All rent to own contracts should be written up by attorneys or atleast reviewed by a real estate attorney.  The contract has to have a lease component and a sale component.  They are legal in all the United States, but I do not recommend doing it.

What if the seller is entering foreclosure?  Would you the tenant buyer know it?  If they got foreclosed on, you’d lose all your equity and get booted out of the house.  There has also been fraud associated with rent to own transcations.

Now for more down side to buyers – what if prices go down and you are locked into purchasing the home for more than it’s worth.  What if interest rates go way up?  If you don’t buy the home, then you lose all your money that was supposed to be going to the down payment.  Some contracts say that if buyers are late on a payment, that payment cannot count towards the down payment.

Realtors don’t have promulgated forms for rent to own options, so you have to pay an attorney to write it up.  Do you know everything you need to put in that contract to protect you and your property?  Neither do I.  That’s why I encourage rent to own buyers to instead use the option of Seller Financing.   Seller Financing can be completed on Realtor promulgated forms and all title company attorneys can write these up easily.  I believe seller financing is a better option for both sellers and buyers/renters.  It’s not just about the forms.  The forms are there because seller financing is more simplistic.  The buyer takes possession right away.  They don’t have to wait to own the property.

If you want to rent to own a home, I recommend you set up seller financing if you are in the state of Texas.  Call me if you want more details.  I can explain better over the phone – 281.288.3500.  Let me know if you want the buyer or seller’s point of view!

This video of 20703 Sunshine Lane is of unrestricted land that can be used for commercial or residential purposes.  It’s approximately one mile from the new EXXON MOBILE Campus being built in Spring, Texas.  It would be a perfect location for a medical complex, a warehouse, manufacturing location, or office suites.  It is about one acre of land that has been filled and leveled, ready for building.  The seller is open to seller financing as an option.

Due to the amount of short sales and foreclosures we have endured over the past two years, it has been my prediction that there will be a lot of well incomed homeowners that need housing that cannot get a mortgage due to these losses.  Therefore, owning houses and selling them to consumers through seller financing instead of with regular mortgage loans will be very lucrative in the coming years.  I predict it will be the new trendy way to generate income instead of flipping real estate or holding onto rentals.  That is just my opinion, of course, but that is what I am predicting.  Below is an article from last month’s Realtor Magazine that explains Seller Financing Pros and Cons that I think every potential seller financing buyer or seller should be aware of.

When traditional lending avenues fail, seller financing can help seal the deal.  But watch out for pitfalls.

If you’re working with sellers who have seen offers collapse
because buyers can’t get a mortgage loan, you might want to suggest they
consider offering some variation of seller financing.  If structured carefully, seller financing not
only makes deals possible but also can typically help transactions close
quickly, as less due diligence is required.
After all, who knows the property better than the sellers?

There are other perks, too:
Sellers can often negotiate an interest rate that’s more favorable than
would be available for other sorts of investments.  And they might also get a higher selling
price as compensation for assisting the buyers.
Finally, there can be some tax benefits; if the seller structures the
loan as an installment sale, for example, there can be tax advantages based on
how recognition of the capital gain is timed.

But against these benefits is the big downside of seller
financing:  the potential for buyer
default.  This risk is compounded if the
deal is structured as a wrap-around deed of trust, as many are.  With a wrap-around deed of trust, the seller
issues a promissory note and deed of trust for the dollar gap between the
amount of the first mortgage and the buyer’s down payment.  When structured this way, the seller’s
performance on the underlying first mortgage is linked to the buyer’s
performance.  If the buyer defaults, the
seller will likely default, too.

Here are some ways to help sellers minimize such pitfalls,
no matter how the transaction is structured:

• Request a
  credit report and credit references.
  Sellers can get a credit report from any credit reporting agency, but
  they’ll want to get a signed consent letter from the buyer first.  For credit references, one place to go is the
  buyer’s landlord, if they’re renting.
  Sellers should also ask for independently audited financial statements.
• Consider
  loan assumption.  In many cases, the
  seller’s existing mortgage loan has a due-on-sale clause that requires the
  principal to be paid upon sale of the property.
  Having to settle their own financing makes it hard for many sellers to
  offer financing, especially if they’re buying a house themselves and need their
  sale proceeds to make their own down payment.
  In these cases, it might be better to simply have the buyer assume the
  seller’s existing loan.  The buyer still
  must submit to the lender’s underwriting analysis and get the lender to approve
  a modification, but the process should be less time-consuming than if they were
  applying for new financing.
• Provide
  expanded remedies.  For many sellers,
  the only remedy for buyer default included in their loan documents is
  foreclosure.  But it’s best to include
  lower-level remedies so foreclosure doesn’t have to be the only option.  Suggest that sellers set rules for imposing
  late charges or default interest.  Or
  suggest that sellers hire a property manager to keep track of incoming payments
  and to spearhead collection efforts, because these activities can be
  time-consuming.
• Understand
  the risks to buyers, too.  Although
  it might seem like most risks are on the sellers’ side since they’re putting
  their resources on the line, there are risks to buyers as well—and if you’re
  working with buyers, you’ll want to be aware of them.  First, buyers could pay the loan in full but
  still not receive title if there are encumbrances that were never divulged by
  the seller.  Second, if the transaction
  is structured as a wrap-around deed of trust and the sellers are supposed to be
  making payments on senior debt, the buyers could be at risk if the sellers fail
  to make their loan payments, even if the buyers are scrupulous in holding up
  their end of the deal.  Third, buyers might
  not have the protection of a home inspection, mortgage insurance, or an
  appraisal to ensure they’re not paying too much.

These are challenging times in credit markets, so there’s a
role for seller financing.  But be aware
of risks so you can help protect your clients.

AUSTIN (Texas Association of Realtors) – Texas Department of Savings & Mortgage Lending Commissioner Doug Foster has issued a notice allowing the continuation of the de minimis exemption until further action is taken by the state legislature.

 This exemption, which was briefly repealed by the federal SAFE Act, means that a seller can once again finance up to five properties in a 12-month period without being licensed as a residential mortgage loan originator.

If your income and savings are making home buying a challenge, consider these options…

1. Investigate local, state, and national down payment assistance programs. These programs give loans or grants to cover all or part of your required down payment. National programs include the Nehemiah program ( http://www.getdownpayment.com ) and the American Dream Down Payment Fund from the U.S. Dept. of Housing and Urban Development ( http://www.hud.gov ).
2. Get the seller to provide financing. In some cases, sellers may be willing to finance all or part of the purchase price of the home and let you repay them gradually, just as you do a mortgage.
3. Consider a shared-appreciation, or shared equity, arrangement. Under this arrangement, your family, friends, or even a 3rd party may buy a portion of the home and thus share in any appreciation when the home is sold. The owner/occupant usually pays the mortgage, property taxes, and all maintenance costs, but all investors’ names are usually on the mortgage. There are companies that can help you find such an investor if your family can’t participate.
4. Get help from your family. Perhaps a family member will loan you money for the down payments and/or act as a cosigner for the mortgage. Lenders often like to have a cosigner if you have little credit history.
5. See if you can qualify for a short-term 2nd mortgage to give you the money to make a higher down payment. This may be possible if you have a good income and little other debt.

Reprinted from Realtor Magazine Online by permission of the National Association of Realtors, Copyright 2005, All rights reserved.