Detroit, Michigan (PRWEB) July 22, 2013 -- There are thousands of real estate transactions- residential and commercial - that occur each year which do not involve a traditional residential or commercial mortgage from a bank Most often it is because a buyer does not qualify for a traditional bank loan, the property does not meet banking standards, or because either the seller or the buyer needs some financial or time accommodation that traditional banks can't, or won't make.
The most common form of non-traditional financing is simply seller financing, which is when the seller of real estate agrees to take a defined amount of payments over a predetermined time, before they deed the property over to the buyer. These arrangements while useful, usually put the buyer at a disadvantage.
Many a buyer has come to me in their moment of crisis, disappointed and surprised to learn that the property they had been making payments on is now in legal or financial jeopardy because of something the seller did, or didn't do. The buyer, having invested substantial monies into a property, stands to lose it all unless they bring legal action, or reach deep into their pockets to cure the seller's problem, now their problem.
This scenario occurs more often than not and buyers who have been through it know the emotional and financial toll it takes to rescue a property and one's investment when a seller's ability to provide clear title is severely impaired.
Here are 7 precautions that a buyer should take when purchasing a property using seller financing.
1. Have a written sales agreement. All real estate transactions must be in the form of a written agreement signed by both parties for it to be enforceable in a court of law. Even an agreement written on a crumpled napkin bearing the signatures of both seller and buyer has been upheld as a contract in court. Without a written agreement, neither party has guidelines as how to govern their relationship with respect to the property and with respect to themselves. Those who proceed without a written agreement deserve the legal and financial heart ache they may encounter in the future to unravel the meaning behind what was verbally stated and agreed upon in the past.
2. Pull title. Make sure that the person(s) that shows up on title are the sellers. If there are others appearing as owners, it's not okay to just to accept an explanation from the seller. Once verified, get the proper parties and supporting legal documentation that as the buyer, you are purchasing from the correct parties in title.
All owners showing on title must be the same as those who appear as sellers in the agreement. Recently, I had a client who had purchased a property owned by two brothers. Unfortunately, one brother was incarcerated in another state. The client was ready to pay off the balance of the purchase price, but the incarcerated brother who had never signed the purchase agreement as was not willing to sell his interest in the property. The selling brother was stuck, and the buyer was irate. The matter was resolved, but not right away. Never accept anything less than having all owners of a property sign at the time of the sales agreement; not a minute after.
3. Trust but Verify. If the title work contains language that reports "certificate of redemption" or something similar, it means that sometime in the past the property was either in tax or mortgage foreclosure and that the seller was late and in default with tax or mortgage payments. The redemption certificate means that the seller ultimately paid on their obligation. Regardless, the seller has a history of placing their property in jeopardy. It is imperative that buyers verify that the seller is not only current on their mortgage or tax obligation, but that they remain so, otherwise the buyer's own investment in the property could be lost because of an irresponsible seller.
Unless the sales agreement states otherwise, the buyer should require that the seller provide written confirmation in the form of a paid receipt, that the taxes are paid current, within 30 days from the date taxes were due. As for underlying mortgage payments, the seller should provide proof that they are current with their mortgage payment by delivering to the buyer the mortgage statement every 90 days.
4. Better they should "cry" than you should "cry".
a. Property condition. Often sellers offering "seller financing" work under the impression that if a buyer needs financing, then the seller can either cut corners with regards to real estate documentation, including disclosures, or that they can pressure the buyer into taking a substandard property at a higher price. Unless the buyer is getting a good price on substandard property there is never a reason for the buyer to feel compelled to take on a problem property. The seller should always provide a disclosure of the condition of the property, or allow the buyer a reasonable time to secure a property inspection.
b. Ask for Provisions. Even when a seller offers financing, sales contracts still need to be negotiated. Buyers shouldn't be shy about asking for terms that they feel comfortable with, such as verifying the seller's timely payments. I once had a client who for many years had paid a seller their monthly payments, only to find later that the owner was not making the underlying mortgage payment and that the home was in foreclosure. Requesting reasonable verification provisions is not only necessary, but expected. Don't let anyone: the seller, the seller's real estate agent, or even the buyer's agent, tell you otherwise. I'm a firm believer that is better for the seller to "cry" now than for the buyer to "cry" at a later date.
5. Buyers need to review the provisions of the seller's mortgage. Many mortgages have provisions that require when a property is sold, the balance of a loan becomes due. This is known as a "due on sale" clause. The bank or lender may not learn of the transaction right away, but imagine the buyer's surprise when three years into performing under the sales contract, the bank calls the mortgage due and neither the buyer nor the seller is prepared with enough money to pay the bank off?
6. Preclude the seller from further encumbering the property. A seller who has a small lien on the property, or even no lien, may crow that the property is free and clear. What prevents this seller from mortgaging the property at a later date, for an amount that exceeds the purchase price agreed upon by the buyer and seller. A provision within the sales agreement can prevent the seller from mortgaging the property altogether, or set limits as to how much a seller's new underlying mortgage could be.
7. Use an escrow.
a. Deed in escrow. At the time of consummating the sale, the seller should be required to place the deed in escrow with the closing title company or third party escrow agent. The escrow will have specific instructions as to when this deed will be released to the buyer. This protects the buyer in the event of a seller's death, or from the seller wrongfully withholding a deed from a buyer who has faithfully upheld the terms of their agreement.
b. Payments to a third party. Buyers should arrange for their monthly payments to be deposited directly into a seller's designated bank account. This ensures that all record keeping and accounting will remain accurate because the buyer has third party confirmation of seller's receipt of good funds.
Conclusion. Seller financing is but one of many creative way for buyers to purchase a property, and seller's to liquidate a property. Agreements that govern the parties relations to the property and to each other, should be reviewed by competent real estate counsel. Sure there are "boiler plate" forms that the parties can be use. "Yes" some experienced real estate agent have opinions; Still they cannot be legally relied upon. Seek proper counsel. As the old adage goes "an ounce of prevention is worth a pound of cure."
About the Author: Since 1990, David Soble has been a real estate and finance attorney in Ohio and Michigan. He advises national banks, lenders, loan servicers, consumers and business owners on residential and commercial real estate, finance and compliance issues. He has been involved in thousands of real estate transactions, being responsible for billions in real estate loan portfolios throughout his career. And while he may at times seem overly harsh, he has 23 years of real estate battle scars to support his tempered cynicism.
David Soble, Proven Resource LLC, http://www.Proven-Resource.com, 888-789-1715, [email protected]