Written by attorney Lara O. Chubaty

Seller Carry and Alternative Financing

There are many alternatives available to sellers who want to offer financing to buyers of their properties. Seller financing can be beneficial to both buyer and seller. Buyer is given an opportunity to finance a home when he or she has been unable to secure traditional financing. Seller can sell the home for a higher price and is able to collect interest along with the principal payments. Choices include: deed of trust with promissory note, contract for deed, option to purchase, lease purchase and lease option.

Deed of Trust: Ownership to the property is conveyed with a lien on it. This is accomplished by executing a promissory note and a deed of trust. Once the promissory note has been paid back in full, the deed of trust and lien on the property are released.

Contract for Deed/Land Contract: A Contract for Deed (also called an Agreement for Sale or Installment Sale Contract) is an executory contract where seller retains legal title until the terms called for in the document are executed in full. Sellers often set this up as an installment contract, with regular monthly payments made over time.

Option to Purchase: Optionee purchases the right (but not the obligation) to exercise an option to purchase the property within a specific limited period of time. This is a tool that can be effective for a buyer who needs time to secure additional investors or is taking time to speculate on the increase in value of the property.

Lease Purchase: Buyer and seller simultaneously agree to both a lease and a purchase at a specified later date. Tenant is obligated to buy the property at a later specified time. This is advantageous to a buyer who needs some time to be able to qualify for financing. For example, a prospective buyer relocating to new a state must establish an employment record there for some time in order to qualify for financing.

Lease Option: In this transaction, the tenant and landlord sign a lease and then also sign an option agreement. Tenant, the “optionee" has the option to purchase the property, but is not obligated to do so. The option requires consideration, a fee for the option, which is non-refundable.

Be careful to look at your underlying mortgage documents. They likely contain a due on sale that states that the full amount may be called due in the event of transfer. It is best to utilize a third party service to protect both buyer and seller. Buyer is assured that payments are properly applied to underlying mortgages and homeowner’s associations. Seller is assured that collection is handled professionally and late payments are properly assessed.

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