Seller financing is an arrangement whereby the Seller provides a loan to the Buyer as part of the purchase agreement. The Seller agrees to receive payments over time from the Buyer instead of receiving the entire proceeds of the sale at the time of closing the transaction. Essentially, the proceeds are “loaned” to the Buyer who then makes payments on an installment basis. The sale transaction can involve a variety of things; real estate, businesses, vehicles and other assets. The Buyer signs a Note and Deed of Trust or Contract of Sale in the Seller’s favor that places a lien on the property and thereby secures the loan. The roles of the Seller and Buyer now become Lender and Borrower. The Seller, now acting as the Lender, collects payments from the Borrower, including interest on the money, until the loan is paid in full.
Both the Seller and Buyer can benefit from a Seller financed transaction. The Seller has an opportunity to earn a greater return on the equity in the property by offering financing to the Buyer. The Buyer who may have difficulty obtaining sufficient cash for a down payment or qualifying for a traditional loan has an opportunity to purchase the property by taking advantage of the Seller financing. Consult with your real estate professional for additional information and to determine if Seller Financing is appropriate for your situation.
Why Seller Financing?
There are many reasons Seller Financing is an alternative to traditional financing:
The seller is seeking a reasonable return on equity through monthly income as an alternative to receiving the entire payment at the time of the sale.
A good buyer cannot qualify for a traditional loan, either lack of credit or sufficient down payment.
There are no bank associated closing costs or credit screening.
The Buyer has all the benefits of home ownership, including interest payment deductions.
The property does not meet the requirements for traditional loans.
The seller is looking to increase the number of potential buyers. When the market is slow, seller financing can attract more interested buyers to your property.
After receiving payments over a period of time, the seller may decide to sell his or her interest in the contract for a lump sum. There are companies and individuals willing to purchase notes for owner-financed properties.
The Seller may enjoy favorable tax benefits from Seller Financing.
Considerations related to Seller Financing
Escrow Agent—Using a licensed escrow company such as Idaho Escrow LLC to act as a neutral third party can be helpful. Escrow companies will calculate the principal and interest, send out reports, pay taxes and insurance, and make sure everything is handled in a professional manner. Escrow companies issue 1098 forms to the borrowers and 1099 forms to the lenders.
Credit Check—Obtain a current credit report on the buyer. If you find that the buyer is not a good credit risk, you may want to require a higher down payment and/or a higher interest rate to protect your property.
Contract Terms—When setting contract terms keep in mind that if you are considering selling your interest in the contract, the cash value of the contract is based on many factors, namely: interest rate, length of term and seniority of lien position.
Assignment of Contract—The contract should include a clause stating that the buyer must obtain written consent from the seller before assigning his or her interest in the contract to another buyer.
Taxes and Insurance—The contract should state that the buyer is responsible for the payment of all future property taxes and is further responsible for maintaining insurance on the property with you listed as the mortgagee. Both parties benefit if the escrow company collects additional monthly funds to cover the taxes and insurance expenses as part of the scheduled payments and then pays these expenses as they come due.
Late Charges—Imposing a late charge when a payment is past due can motivate the buyer to make payments in a timely manner.
Preparation of Legal Documents—It is prudent to have an attorney handle the preparation of any legal documents, especially any contract associated with the transaction. Most title or escrow closing companies can complete a simple promissory note and deed of trust.
Title Insurance—Obtaining title insurance is important to ensure there are no liens and the title is clear.
Closing Agent—It is in the best interest of both parties to use a neutral third party to close the sale transaction. Title and escrow closing companies specialize in closing real estate transactions and non-real estate transactions.
Contract For Deed
Idaho Escrow is a licensed professional third-party administrator escrow agent for Contract for Deed contracts.
What is a Contract for Deed?
A Contract for Deed is a real estate contract in which the seller finances the sale of the property, the buyer pays the purchase price in installments, and title is transferred after the payment is made in full. Typically a Warranty Deed is executed and held by an Escrow Company through the payment period.
Because Contract for Deed is a Contract:
The Seller and Buyer negotiate all terms of the contract, including the interest rate
There are no additional requirements to meet for a third-party prior to closing
There are no mandatory appraisals or inspections
There are no lender requirements to meet a certain debt ratio, income ratio or loan-to-value ratio
Consult your attorney to prepare this contract
Note and Deed of Trust
Idaho Escrow is a licensed professional third-party administrator escrow agent for Notes and Deed of Trust contracts.
What is a Note and Deed of Trust?
A Note or Promissory Note is a promise to pay a negotiated amount of money over a specific period of time at a specific interest rate. The Deed of Trust is an instrument that, when recorded, secures a lien on the property to ensure the performance to repay the Note. The Deed of Trust is recorded immediately after title is passed. In Idaho title is passed using a Warranty Deed and sometimes a Quitclaim Deed.
When a transfer of title takes place and is subject to an existing loan an All-Inclusive Note and All-Inclusive Deed of Trust are used in order to properly disclose that the existing lien will remain on the property for all or part of the repayment period. Note: most institutional loans have due on sale provision and the use of an All-Inclusive Note and Deed of Trust may violate the lenders Deed of Trust.
Lease Purchase Transactions
Idaho Escrow is a licensed professional third-party administrator escrow agent for Lease Purchase Transactions.
What is a Lease Purchase?
A Lease Purchase is a real estate contract in which the seller leases the property and negotiates the sale of the property at a future date with specific terms. The buyer pays rent or lease payments through the lease period and then is obligated to complete the purchase within the time period specified. Sometimes equity credit is given during the lease period that counts toward down payment at the time of closing. All terms are negotiable and the sky is the limit.
Idaho Escrow can service seller-financed sales of any type of business. If you are looking to sell your business, offering seller financing can increase the number of potential buyers and using the services of Idaho Escrow makes this option more feasible. In today’s economy, very few buyers have the ability to purchase a business without some form of financing. Your prospective buyer may be a family member, a friend or a current employee. By offering to finance the sale, you are allowing your business to remain a financial asset after transferring physical ownership.
Idaho Escrow provides closing services for Contract for Deed, Deed of Trust, All-Inclusive Deed of Trust (Wrap Around) and Lease Purchase transactions in which title insurance is not required, such as a sale transaction between family members. These transactions can be for real estate, businesses, vehicles, RVs, boats or any other asset where a stream of payments is used to purchase the asset.
A reserve account is an account used to set aside funds monthly for the future payment of expected or unexpected expenses. Idaho Escrow services many reserve accounts for the payment of property taxes and insurance.
Interested in Selling Your Contract?
Idaho Escrow is always interested in purchasing Notes and Deeds of Trust and or Contracts of Sale. If you are looking to sell, we would be more than happy to review your escrowed contract. Please contact Marc Banner at 208-377-2212 ext 1504 to get started.