Warning to Buyers

Unless you have a great deal of experience and are very knowledgeable about Real Estate and the law, we strongly recommend you seek professional legal help. There are numerous "Get Rich Quick in Real Estate" schemes and seminars advertised on television and radio whose end result is that a lot of amateur investors make a lot of money and the seller takes all the risk. The "For Sale By Owner" market is the primary target of these investors and you will definitely be hearing from them. We are not saying don't listen, don't consider! Just don't sign without professional help! If you do not know a professional whom you trust, we can refer you to one we know will give you the best service at the lowest price.

Creative Financing
There is nothing inherently wrong, illegal or bad about any of these creative ways to structure the sale of a property. However, unless the seller is very aware of all the possible risk factors of the creative terms, what may look very inviting on the surface may easily become a Seller's worst nightmare and cost thousands. If you are not getting all cash at closing, you need to see a professional before accepting the offer.

Contract Sales
If you are familiar with any of the numerous "GET RICH in REAL ESTATE" seminars and courses advertised, you are no doubt familiar with their use of "Seller Financing". These types of transactions are also commonly referred to as " having "A Wrap Around", "Taken Subject To", or just "Sold On Contract". In these types of sales, the Buyer takes title to the property, and the Seller receives in return generally some cash, representing equity, and the Buyer's promise to take over payments. Unfortunately, the seller will still remain responsible for the mortgage regardless of what the contract says even though they no longer own the property. If the Buyer does not make the payments, only you, the "Former Owner" has any Credit and Liability problems. If there is no other way to transfer ownership than "On Contract", the Seller should at least get form the Buyer an "All Inclusive Note" that encompasses all other mortgages, that is secured by an "All Inclusive Trust Deed" on the property. It's not much protection but at least it does give the Seller the option, if they are willing to take the substantial loss, to foreclose on the property and get it back if the buyer does not make the payments.

Very Possible Outcome To Seller of a Contract Sale
One of the most popular methods taught in these "Get Rich in Real Estate" courses is for the Investor to purchase the property "On Contract", generally with little or no money down. They keep the former Owner's loans in place and just take over payments. The Inventor will then rent or lease option the property for a higher payment. The Inventor expects to gain a positive cash flow for personal support while his properties are being paid off by someone else. This works great if everything goes as the "Seminar Trained Amateur Investor" planned, but what happens if it doesn't. Most of these investors do not have the financial ability to sustain a loss and even if they did, would not take a loss if they could pass it to someone else. What happens if the property is vacant for a couple of months or worse yet the renters have to be evicted which might take up to six months with no rent. What happens if the evicted renters vandalize the property as they leave?  Can or will the investor bear the considerable loss since they could simply walk away from the property. The mortgage company will only go after the former owner and only the former owner will have a foreclosure show up on their credit report.
Another group that tries to get Sellers to transfer title to them with a "Contract Sale" are the credit impaired. Because of recent credit problems or even a bankruptcy, these Buyers are not able to obtain financing. They want the Sellers to provide the financing for a couple of years and then they will refinance to pay the Seller off. Unfortunately, all of the above risks are there if the Buyers do not make the payments. Ask the question. If the Bank will not loan them money, why should I?

Partial Seller Financing or "Seller Carry"
With this form of "Creative Financing", the buyer obtains a 1st mortgage from a institutional lender and the Seller will loan the buyer the remainder to cover the sales price. The Sellers loan is secured by a "trust deed note" against the property making it a 2nd mortgage. For the truly informed Seller, such terms might be very beneficial, and for the uninformed Seller the same terms might turn out to be a nightmare.
BENEFITS of a "SELLER CARRY"
(1st) By accepting creative terms, the number of buyers that can qualify to purchase their property have been dramatically increased. For instance, buyers with serious credit problems or Self Employed individuals that cannot verify income could qualify as potential buyers. Obviously, you should ask yourself the question: "If the Bank will not give them a 2nd mortgage because of risk considerations, why would I be willing to take on such risk. The reason is because that might be the only way to sell your property in time. An informed Seller must weigh the risks and make an informed decision.

(2nd) A second benefit for the seller might be that presently they do not need the money and the interest rate from their savings account does not look nearly as good as the 10% offered by the Buyer. Institutional 2nd mortgage rates are always higher, even for perfect buyers, so a Seller could get a considerable higher return than with CD's and savings accounts.
(3rd) The income tax liability from the profit on the sale is all due and payable in the year sold for a Seller that takes all cash. If the Seller takes the Profit spread out over a number of years, the Tax burden could be greatly reduced. (This is true only for some Sellers, so Sellers should seek advice from a qualified Tax Planner).

RISK of a "SELLER CARRY"
Will the Buyer perform and will the Seller ever see their money? Title to the property has now passed to the Buyer and in return the Seller has a lien in 2nd position. If the Buyer chooses not to pay, what are the options for the now 2nd Mortgage holder? Only Three! (1st) Write the whole thing off as a bad experience, (2nd) Hope that the property will be sold in the near future and they will be paid, or (3rd) foreclose on the property. Foreclosure is almost never an option for a 2nd mortgage holder because the 2nd almost never gets any money.

The Best Way for a Seller to Protect Themselves in a "Seller Carry" Transaction.
The only way for a Seller to reduce risk when considering a "Seller Carry" is not to lend to the "Wrong Buyer". It is a scary thought to realize that just about anyone can qualify for a 1st mortgage if they have a 10% "Seller Carry" regardless of credit or income. The fact that they can obtain a 1st mortgage means nothing as to their financial ability and credit. Unfortunately, since a Seller almost never has access to a Buyers credit or financial reports, most Sellers make their decision blind.

My personal opinion is that I would never loan money to anyone unless I knew as much about his or her personal finances and credit as I do my own. A lending institution would never consider making a loan without this kind of information, why should you loan money with anything less?
To help Sellers and Buyers minimize these concerns, we would be happy to refer you to a mortgage company that understands the problems and can work with both Sellers and Buyers to alleviate these concerns.  Just call or email us at the contact information above and we would be happy to assist you in a safer transaction.