Q: If we owner-finance, do we have to register the note with county? We want to hold the deed until the loan is paid off. What if the buyer defaults? What recourse do we have? –Joanne
A: Your question is one of those where I have a technical answer, and then some bigger themes and action items that arose when I read it.
Seller financing can be a great route to a win-win: You can get a home sold that wasn’t moving otherwise, or can demand a premium price and avoid all the complications of mortgage underwriting and appraisals, while the buyer also gets smooth sailing and possibly is empowered to buy a home, when she might not otherwise have qualified for a home loan at all.
But it’s not all win. The buyer might pay a premium price at a time when homes are selling at bargain prices, and almost certainly pays higher interest than she would pay to a mainstream mortgage lender.
And you, as the seller, forgo the ability to totally divest of the property with a check for the full price in hand, as you would have if you sold the place to a buyer with traditional financing.
Of course, you’re also taking the risk — as you’re well aware — that the buyer could default any time over the term of your agreement and you have to foreclose on and repossess the property.
So, let’s talk about how to manage your own risk if you agree to extend seller financing.
1. Seller financing makes you the mortgage lender. As such, you should obtain documentation that secures your interest in the property similar to those a mortgage lender would use. In many areas, this will include a document called an installment sale agreement, a land contract or a contract for deed. In these situations, you retain title and the deed until the agreement is paid off.
While that sounds good, it also means your name remains as the taxpayer and party responsible for any city ordinance violations, like overgrown weeds or delinquent garbage bills. However, in some areas, it is possible to actually transfer the title to the property and record a note and deed of trust in cases of seller financing, but that can open up an entirely new can of worms.
To answer your question, whatever route you go, the documents will absolutely need to be recorded with the county recorder’s office in order to secure your ability to foreclose on and repossess the home if the buyer defaults.
2. Get a lawyer, stat. How do you know which agreement type to use, what your obligations and rights are, and which i’s to dot and t’s to cross to ensure that you have recourse in the worst-case scenario? You won’t, unless you get a local real estate lawyer to advise you, and (ideally) to prepare the documents.
Real estate law is highly technical, and some documents can fail to stand up later because of a missing notarization or phrase, or a failure to be recorded, among other things. Stakes are big here — this is not a do-it-yourself situation. The few hundred — even a thousand — bucks you might pay a lawyer to draft the right documents and give you the advice you need is well worth it.
3. Understand the risks. Obviously, it’s possible that any borrower could default on any loan. But be aware that if you are charging the buyer a premium for the home, and/or if the buyer is taking your seller financing because she is severely credit-impaired, there may be a significant risk that she will, in fact default.
If the buyer overpays now, she’s basically starting out upside down, which may seem worthwhile now, but could cause a serious case of buyer’s remorse in the future. Studies show that negative equity is a big driver of strategic defaults (i.e., walking away from a home and mortgage) even years after closing.
Also, if the buyer has a recent foreclosure or other negative credit history, just know that the statistical risk that she will default is higher than normal.
Take these things into consideration as you evaluate your options, decide whether to extend seller financing and, if you do, as you put your action plan in place for executing the transaction while protecting your own interests from the possibility of the buyer’s default.