- October 27, 2013
- Posted by: U.S. Title Records
- Category: Real Estate Post, Title reports, Uncategorized
One creative way to acquire real estate? Non-conventional financing. An owner-carry contract, also known as seller financing, can be a great way purchase property if the buyer has enough capital to leverage the transaction. This is an attractive option when conventional financing is difficult to attain for various reasons. Sometimes the buyer is unable to obtain financing due to a recent bankruptcy, temporary credit issues, length of employment, self-employment when minimum number of tax years have not been met, and/or stricter lending criteria resulting from the Dodd-Frank Act in the aftermath of the 2008 Great Depression. http://www.cnbc.com/id/47075854.
Typically, a 10% to 20% down payment can seal a deal, and the owner will carry the financing for a term of 1 year to 5 years – sometimes longer, depending on the needs of the seller. The interest rate for the contract is generally higher than current bank rates, since the seller assumes the liability of carrying the note, yet transfers certain interest in the property to the buyer, including the right to improve, lease or sell the property.
The seller acts as the bank and collects the interest income just as a bank would. The payments can be amortized over time or interest-only, which are sometimes negotiated with shorter term contracts or when the buyer intends to renovate and resell or lease the property. The seller is generally guaranteed a certain cash-out price by a certain date. All the terms and conditions of the contract, including default, tax payments and deductions, homeowners association assessments, and insurance are up for negotiation, as is the seller’s right to foreclose on the property and the relevant time periods to cure defaults.
Prior to entering into a contract with a seller and making a down payment, the property should be thoroughly researched. This is where some real estate investors get in trouble. The parties should be weary of existing mortgages and the associated terms and conditions, including a lender’s right to enforce a due-on-sale clause, if any. Hiring a title company or a title research company to provide a preliminary title report will give a buyer the general condition and marketability of the title. This would include access to any deeds of trust and expose issues and liabilities such as tax, judgment, HOA, medical, mechanic and other liens recorded against the property. This would also include existing mortgages or lines of credit on the property. It is worthy to note that while general tax liens filed by the Internal Revenue Service against individuals may affect a given property owned by that individual, those liens do not always appear on lien reports generated for a given property address. The search must be made under the individuals legal name in the county within which the subject property is located.
Equally important is understanding what the seller’s equity position is when agreeing to a cash-out or sales price, the neighborhood statistics and the true comparables in the area. Also, if there is a current mortgage, setting up a servicing account for the payments ensures that the payments are forwarded to the mortgage company, if any, and that taxes, insurance and homeowners assessments are paid on a timely basis. The fee is nominal and worth it. The advantages of seller financing can be a win-win for the buyer and seller, as long as negotiations are based on all of the facts and terms within are well written.