Now that the market is changing yet again, it may be a good time to think about alternative financing for your end buyers as a way for you to make a small return on your investment. The agreement for sale has been around for many, many years and is coming back “in style”. This is perfect for all of the renters out there with great jobs and good income but horrible credit. They want to get back into the market place but still need time for their credit to recover.
The agreement for sale is a great way to get this done and give both buyer and seller peace of mind. Although the agreement for sale is one of my favorite vehicles for alternative financing there are a few things you need to be aware of. If you are the seller helping a buyer purchase your home through an agreement for sale you are going to stay in “Fee Title” to the property. This means that you will be the title holder until the agreement is fulfilled. The buyer will get what is called “Equitable Title” on the property. This equity is the difference between what is owed on the property and what the sales price is, not the value of the home minus what is owed. I am making this clear because the more equity your buyer has in the property the harder and longer the process is to get the property back. . The time periods vary from 30 to 180 days according to the amount of Equity the Buyer has accrued based on the sale price and remaining balance, less than 20% – 30 days, 20% to less than 30% – 60 days, 30% to less than 50% – 120 days, more than 50% – nine months. You should be sure to check with an attorney on the amounts and time lines this type of alternative financing requires. Let’s also keep in mind that our friend Frank Dodd says we cannot originate more than three loans a year without an originators license.
You cannot charge fees to the buyer for financing through an agreement for sale or you may have the government knocking at your door to see your licensing. It is similar to a hard money or private financing loan with a note and deed of trust. Let’s always keep to the cardinal rule of investing in mind, “don’t get Greedy and don’t get into trouble” This is your business so follow the rules!
Now that I have all but scared you away from the Agreement for Sale let’s talk about the good side. The Forfeiture feature on an Agreement for Sale can be very attractive to the investor because it is much faster, in most cases, than foreclosing a Deed of Trust which is a 90 day waiting period.
With the agreement for sale you can write whatever terms you want and keep as much control as you want (well, as much control as both parties “agree” to). You can use an agreement for sale to wrap an underlying lien. There are three types of loans that cannot be “wrapped”, the first is the FHA which can never be wrapped. Line of credit loans should never be wrapped and VA loans can only be wrapped when using an agreement for sale. Just go on line and Google “Agreement for sale, Arizona” for more specific details. (In some states it is called “contract for deed”). Basically in this market alternative financing is an excellent way to go……just please be sure you read up on the Frank Dodd guidelines and the different types of financing and documents that will give you the greatest return on your investment.
The Arizona Usury laws cap interest rates for financing at 10% unless a different rate is contracted for in writing, in which event ANY rate of interest may be agreed to by the parties. So, that being said, if the payment fits your buyers needs and both parties agree to whatever interest rate you are applying you can have a lot better return on your money. Once it is set up just sit back and let your servicing company collect the money for you and keep track of the payments and interest. You can also have the taxes and H.O.A. payment included to insure payments are being made properly.
Please be sure, as always, to work with an escrow officer who is familiar with these types of transactions. Your title company can prepare the documents for you as a part of their escrow services.