Delayed Sales

First – need to complete some type of screening. I would suggest a rental application that allows the seller to also run credit – you may want to go with a back ground screening company and have them provide you with a form and you might also want to have the buyer to get their own credit report for you from FreeCreditReport.com

Second – you need to take a look at the credit worthiness of the buyer and determine if you want to sell it to them with a True Owner Finance, a Contract for Deed, or a Rent to Own. If the seller feels that the buyer is very likely to succeed in paying them off, will maintain or improve the property, will make the payments, and eventually pay them off, then a True Owner Finance would be a good option.

If the seller feels that the buyer more than likely will not improve their credit and pay them off, may not keep up with taxes and insurance, and could just change their mind, then a rent to own or lease to own would be a good choice.

The contract for deed is somewhere in the middle of the two.

But let’s look at the mechanics of each.

True Owner Finance- there is a complete real estate contract with an owner financing addendum spelling out the terms of the owner finance: amount financed, interest rate, length of loan, any balloon payments, etc. Somewhere in the contract they also need to agree on who will pay taxes and insurance. Will the buyer be responsible for paying taxes and insurance or will the seller pay these and collect money for an escrow account like a regular bank.

Once the contract is all decided upon, then it goes to the title company just like a regular sale with a regular lender like Bank of America. Title work will be ran and then a closing will be scheduled. There will be closing fees on both sides of the sale for both the buyer and the seller as well as tax prorations from the seller to the buyer. Figure at least $500 for the buyer’s side of closing and $500 for the seller’s side of closing, plus tax prorations.

At closing the buyer will sign an deed of trust and a promissory note promising to pay the loan off and that outlines the terms of the note and any escrowing of taxes and insurance. Buyer will pay to the title company their down payment less any earnest money fees that have already been paid, plus their side of the closing fees. The seller will sign the closing and collect the down payment less any fees they need to pay to the title company.

Now if everything goes well and the buyer pays as promised and takes care of the property as promised everything is hunky dory, but if there is a problem in the buyer making payments, and the seller needs to take the house back, problems arise. Unlike with a rental tenant, in an owner finance, the buyer actually owns the house and the seller now owns a deed of trust or a promise from the buyer to pay him. If the buyer does not pay, the seller needs to foreclosed on house to get the house that was pledged against the promissory note and deed of trust.

One way around the foreclosure would be to have the buyer sign a warranty deed from the buyer back to the seller at closing to be held in a file against a day that the buyer might not live up to their end of the obligation. If that should happen, the seller could then file the deed in lieu of foreclosure, but this could also land the seller in court anyway and if the buyer will not leave, an eviction would need to take place.

So you can see with a true owner finance, that you want to be very sure of the buyer living up to their end of the bargain.

If you are not so comfortable with the buyer, some people will turn to a contract for deed. Please keep in mind that with true owner finance, the buyer will own the property and the seller will own the note. With a contract for deed, both the buyer and the seller own the property, so the buyer can do anything with the property that any owner of a property could do except get another loan or a 2nd loan on the property with out the consent of the seller.

Basically with a contract for deed you will be doing almost the same things as an owner finance, except there will not be a deed of trust and a promissory note filed. There will be title work, there will be a closing with associated fees. The contract for deed will be the contract that is signed at closing that states all the terms that must be met by the buyer in order for the seller to ultimately sign away their rights on the deed.

Again if the buyer does not perform the seller would still need to foreclose because the buyer would have ownership rights to the property. And again you may be able to get around this with a warranty deed being filled out and signed up front deeding the house from the buyer back to the seller to be held in a file.

To file or not to file. Some sellers will create a contract for deed and treat it like a lease to own contract and not go through a title company and not file it, just fill it out and keep it in the file cabinet. Then if the buyer does not perform, they have not had any paperwork filed at the courthouse and then have no ownership rights. This will work, unless your buyer is smart enough to figure out that they are being screwed and then go out and file the paperwork themselves, or go to court against the big bad investor.

Also if your buyer is using the contract for deed as a way to buy the house and then refinance out of the contract for deed, which is easier than a straight purchase loan, the contract for deed will need to be filed at the courthouse. And if you talk to most attorneys, at least the ones I have talked to, they don’t like contract for deed. They would ask you to choose between the true owner finance and a lease to own. At least in the Kansas City Market.

If the seller is very unsure of the buyer, then he may want to go with a lease to own, rent to own, lease option. Basically this is a rental agreement combined with a purchase agreement or an option to purchase agreement. If you are sure you want to sell and the buyer is sure they want to buy, then a lease to own would be a lease with a purchase contract.

The lease will be basically like a standard rental agreement only you might include that some portion of the lease payment will be added to the down payment amount when the buyer finally decides to buy. Then there will be a sales agreement setting forth a price that will be paid in one, two, or three years.

These two agreements will outline who pays for what. Usually the seller is responsible for hazard insurance, real estate taxes, and any minor repairs. Then the buyer is responsible for renters insurance and any major repairs. The down payment amount is usually non-refundable and any major repairs made to the property stay with the property if the buyer is unable to buy at the end of the lease.

What is very nice about the lease to own is that if the buyer does not perform, you just have to evict them, no foreclosure as the seller still owns the property and the buyer is just renting and has the hopes of buying it in the future. Usually no title company is involved until the buyer is able to put together true financing and get a loan and buy the seller out.

So you can see that screening your buyer’s and figuring out where they fall in the ability to pay department will help you determine which form of delayed sale or owner financing to use.

I am not an attorney and have not had a lot of experience with any of these ways of delayed sale. We have had a few lease to owns and we are contemplating a true owner finance with one of our tenants that we have had for 4 years. I would highly recommend a little more education, talking it over with your attorney and title company and lender advisors to get their take on this as well.

With today’s market and the almost non-existence of sub-prime loans, we as sellers need to do two things: first find an excellent lender that offers FHA and Fannie Mae loans for first time home buyers and educate ourselves on how to get our buyers qualified for these loans, and the for those that cannot get a loan, the true sub-prime borrower, one of the above 3 ways of delayed sale, might help a few more people purchase a home that would otherwise need to remain rental tenants.

If you want to learn more about delayed sale, one resource that I have found very helpful is William Tingles’ Ultimate Subject to Guide Book. In this he buys houses subject to the existing financing and then sells them with a delayed sale, usually a contract for deed or a lease to own. MAREI members can access a replay of him speaking at MAREI in 2009 in the General Meeting Archives.