We all have seen the tremendous amount of people being affected by foreclosures and short sales over the last few years. There are very few who weren’t touched by this and are able to qualify for the traditional FHA or Conventional loan. In today’s crazy and ever changing world of real estate, Investors must stay on their toes and constantly reinvent the wheel. This brings me to the term of “Seller Financing” or “Seller Carryback.” As the volume of sales dip and money tightens, Seller Financing/Carryback loans once again become a popular way for Sellers to maximize their investments.
This is where the Investor, who is acting as the Seller in a transaction, also acts as the Lender and finances the property. This significantly increases the Investor’s ability to market potential Buyers in many different ways. The home becomes more attractive since the Buyer does not have to qualify for a traditional bank loan. Another perk? It’s a proven fact that by offering these types of terms to potential Buyers, that the value of the property may increase.
Now that you understand the reason behind Seller Financing let me take you through a typical escrow transaction in our office.
The transaction begins as a normal escrow would with an executed contract and earnest money deposit. The Seller will have discussed with the Buyer the terms of the loan and will make their Escrow Officer aware of them. For example: “Purchase price is $60,000.00, buyer to bring in $1,000.00 for earnest money deposit and may be required to put down an additional $9,000.00.” The contract may call for an above market rate such as 10% to 12% or higher, and can be amortized over 30 years with a 5 or 10 year balloon. The Seller can also choose if the closing costs will be paid in addition to the down payment or added to the loan. We call these the terms and will use them to draw up the Note and the Deed of Trust for the transaction. The Settlement Statement is created adding all the closing costs and prorations for the transaction and, based on the total, we determine how much the loan amount will be for the Deed of Trust.
Security Title Agency offers an account servicing department for Seller Financing transactions. It allows a neutral party to collect and disburse the funds, thereby maintaining an accurate balance, hold the release documents until the loan has been paid in full, issue the necessary IRS documents for tax purposes, and pay the taxes and/or insurance for impound accounts that are established. The set up fees and monthly servicing fees can be the responsibility of the Buyer, or they can be split between the Seller and Buyer if that is the agreement.
After all the documents have been completed the Note and Deed of Trust will be sent to the Seller for approval and signings will be scheduled. The whole process from open to close can take up to as little as two to three business days, if the Preliminary Title Report is clean. The first payment is usually due 30 days from closing and will continue monthly through the end of the note term.