SlideShare una empresa de Scribd logo
1 de 61
Descargar para leer sin conexión
Financing Residential Real Estate

Lesson 13:
Seller Financing
Introduction
This lesson will cover:
 how seller financing works
 why seller financing is used
 forms of seller financing
 alternatives to seller financing
 agent’s responsibilities in seller-financed
transactions
How Seller Financing Works
Two ways for seller to finance buyer’s
purchase:
 purchase money loan
 land contract
How Seller Financing Works
Mortgage or deed of trust
 Seller is extending credit to buyer, not
providing loan funds.
 Buyer makes installment payments to
seller.
 Seller is mortgagee or beneficiary, with
right to foreclose in case of default.
How Seller Financing Works
Contract for Deed
Buyer (vendee) takes possession of property,
but seller (vendor) retains title until contract
price paid in full.
 Alternative to a lien.
 Seller extends credit to buyer.
How Seller Financing Works
Seller financing may be:
 primary financing
 seller is buyer’s main or only source of
financing for purchase
 secondary financing (seller second)
 supplements primary loan from
institutional lender
 covers part of downpayment or closing
costs required for primary loan
How Seller Financing Works
Choosing finance instrument
Seller generally decides which type of finance
instrument
 Real estate lawyer should
prepare/review.
 Deed of trust: trustee must be appointed.
Why Seller Financing is Used
Seller financing can:
 attract buyers when interest rates are
high
 help buyer qualify for institutional loan
 enable seller to charge higher price
 provide tax benefits to seller
Why Seller Financing is Used
Seller financing:
 seller isn’t bound by institutional policies
regarding yields, loan-to-value ratios, or
qualifying standards
 not an option for seller who needs to be
cashed out quickly
Seller Seconds
Seller second:
 buyer paying most of purchase price with
institutional loan
 seller accepts second mortgage for
remainder
Seller Seconds
Supplementing a new loan
Seller second supplementing new
institutional loan must meet institutional
lender’s standards.
Combined loan to value (CLTV)
Credit
Income and debt ratios
Assets (including reserves)
Terms
Supplementing New Loan
Buyer’s situation

Factors in buyer’s financial situation may
shape design of seller second:
 funds available for down payment
 buyer’s qualifying for total monthly
payment
 interest rate
 balloon payment
Supplementing New Loan
Buyer’s situation

May be easy to refinance seller second with
balloon payment if:
 property has appreciated substantially
 interest rates are low
But if interest rates are high or property has
lost value, refinancing could be difficult.
Supplementing New Loan
Seller’s situation

Seller’s evaluation of second:
 cash at closing
 monthly income
 timing of payoff (balloon payment)
 yield on investment
 tax consequences
 lien priority
Seller Seconds
Supplementing an assumption
Seller second can supplement buyer’s
assumption of seller’s existing mortgage.
 Buyer makes payments on seller second
to seller.
 Buyer takes over monthly payments on
seller’s existing mortgage.
Seller Seconds
Supplementing an assumption
Assumption only possible if:
 existing mortgage doesn’t have due-onsale clause, or
 lender agrees to assumption.
 Needed to release seller from liability.
 Usual underwriting standards to
evaluate buyer assuming loan.
Seller Financing as Primary Loan
Unencumbered property
Seller financing is most flexible when seller
has clear title to property.
 Buyer and seller negotiate price and
terms
 Buyer may need less cash
 May not have discount points or
origination fees
 Lower closing costs
Unencumbered Property
Protecting seller’s security

First lien position if finance instruments are
recorded.
Seller should still be concerned with:
 property taxes
 special assessment liens
 hazard insurance
Unencumbered Property
Protecting seller’s security

Failure to pay taxes or insure property should
be grounds for default under the finance
instrument.
 Seller can require impound account.
 If not, seller should require proof be sent
to him.
Unencumbered Property
Institutional second
Buyer might want to supplement seller
financing with secondary financing from lender.
 Seller should investigate terms of
proposed second loan before agreeing to
transaction.
 Can buyer afford monthly payments on
both loans?
 Does second have provisions that
make default likely?
Unencumbered Property
Contract for deed
Seller may choose to use a contract for deed
instead of mortgage or deed of trust. Also
known as:
 land contract
 bond for deed
 conditional sales contract
 installment sales contract
 installment land contract
 real estate contract
Contract for deed
How contract for deed works
Seller (vendor) keeps title to property until
buyer (vendee) pays off entire purchase price
in installments.
 Legal title: vendor’s title during contract
term.
 Equitable title: right of vendee to possess
and enjoy property.
Contract for deed
How contract for deed works
Contract:
 not accompanied by promissory note
 states all terms of sale and financing
arrangement between vendor and
vendee
 should always be recorded
Contract for deed
Remedies for breach of contract
Forfeiture: penalty if vendee breaches
contract.
 Vendee’s rights in property are
terminated.
 Payments may be kept by vendor as
liquidated damages.
 Vendor may retake possession of
property immediately.
Contract for deed
Remedies for breach of contract
In Texas, repossession not allowed
40% of the amount owed OR
has made 48 monthly payments
Trustee must be used to sell property
instead
Contract for deed
Remedies for breach of contract
Vendee refusing to leave means legal action
to clear title and remove vendee from
property.
 Drawback for vendor: may take months.
Contract for deed
Remedies for breach of contract
Judge may:
 enforce contract as written
 give vendee time to pay off contract
balance
 allow vendee to reinstate contract by
paying delinquent payments plus interest
 order sheriff’s sale of property
Contract for deed
Advantages and disadvantages
Advantages for vendor:
 legal owner until contract paid in full
 may reacquire property in event of
default
Contract for deed
Advantages and disadvantages
Disadvantages for vendor:
 delay and expense of court proceedings
 uncertainty of trial results
Contract for deed
Advantages and disadvantages
Advantages for vendee:
 slow court proceedings
Contract for deed
Advantages and disadvantages
Disadvantages for vendee:
 vendor remains legal owner
 judgments against vendor might cloud
interest
 uncertainty of court decision
Contract for deed
Using a contract for deed
Lenders generally don’t permit financing to
vendees due to the nature of the ownership
Two possible solutions:
 Vendor agrees to have property stand as
security for institutional loan.
 Vendee could mortgage his equitable
interest in property.
Contract for deed
Using a contract for deed
Vendor agrees to have property stand as
security for institutional loan.
 Vendor doesn’t assume personal
responsibility for repayment.
 Lender can foreclose on property but
can’t sue vendor for deficiency.
Seller Financing as Primary Loan
Encumbered property
Seller of encumbered property can’t afford to
pay off existing mortgage at closing.
 Seller second was one alternative.
 Wraparound financing is another
alternative.
Encumbered Property
Wraparound financing
Wraparound financing:
 property remains subject to underlying
loan
 buyer does not assume underlying loan
 seller remains responsible for payments
 buyer makes monthly payments to seller
 seller uses part of buyer’s payment to
make payment on underlying loan
Wraparound Financing
Choice of finance instrument
For wraparound, seller can use:
 mortgage
 deed of trust
 contract for deed
Deed of trust used for wrap: all-inclusive trust
deed.
Wraparound Financing
Underlying loan: no due-on-sale clause
Wraparound financing is only proper if
underlying loan doesn’t have due-on-sale
clause and lender approves of it.
 Silent wrap: without lender’s consent.
Wraparound Financing
Compared with assumption + second
If seller’s existing loan has no due-on-sale
clause, parties can choose between:
 assumption plus seller second
 buyer gets benefit of existing loan with
below-market interest rate
 wraparound
 may give buyer below-market rate and
seller above-market yield
Wraparound Financing
Seller’s yield

Seller’s yield depends on:
 amount of credit extended to buyer, and
 difference between interest rate on wrap
and rate on underlying loan.
Credit extended is:
 difference between wrap amount and
balance on underlying loan
 not full amount of wrap
Wraparound Financing
Seller’s yield

Example:
Sales price: $200,000 Downpayment: $20,000
Underlying loan: $150,000, balance at 6%
interest
Wraparound: $180,000 at 7.5% interest
$180,000 Wrap financing for buyer
– 150,000 Seller’s underlying loan balance
$30,000 Credit extended to buyer
Wraparound Financing
Seller’s yield

Example, cont.
In first year:
 Seller collects $13,500 in interest from
buyer.
 Seller pays $9,000 in interest on underlying
loan.
 Net interest to seller: $4,500.

Net Interest ÷ Credit Extended = Seller’s Yield
$4,500 ÷ $30,000 = 15%
Wraparound Financing
Protecting wraparound buyer
To ensure seller makes payments on
underlying loan:
 provision in finance instrument requiring
seller to make timely payments, and
allowing buyer to pay lender directly if
seller defaults
 “Request for Notice of Delinquency”
 escrow account managed by third party
Alternatives to Seller Financing
Seller can help with:
 buydown
 contribution to closing costs
 equity exchange
 lease/option
 lease/purchase
Alternatives to Seller Financing
Buydowns
Buydown: seller pays to reduce buyer’s
interest rate on loan.
 Seller proceeds are reduced by amount of
buydown.
 Buyer more easily affords lower payment
and/or qualifies easier with lower DTI
Alternatives to Seller Financing
Contributions to closing costs
Seller sometimes willing to make up shortfall
when buyer doesn’t have enough money for
closing costs.
 Lenders impose limits on amounts.
Alternatives to Seller Financing
Equity exchanges
Seller may be willing to accept other assets
from buyer and reduce cash sales price.
 Equity in vacant land or personal
property.
Alternatives to Seller Financing
Lease arrangements
Sometimes buyer wants to lease home before
actually buying it.
 Time to get cash for closing or
downpayment.
 Cannot currently qualify for loan.
Alternatives to Seller Financing
Lease arrangements
Seller can lease property to prospective buyer
in one of two ways:
 lease/option arrangement
 lease/purchase arrangement
Lease Arrangements
Lease/options
Lease/Option: lease agreement includes
option to purchase.
 Seller leases property to buyer for term.
 Buyer granted option to purchase
property at certain price during lease
term.
 Seller = Landlord/Optionor
 Buyer = Tenant/Optionee
Lease Arrangements
Lease/options
Lease/option:
 buyer has no obligation to buy
 seller can’t sell property during option
period
 can be used even if seller’s loan has
due-on-sale clause
Lease/Options
How lease/option works
Lease/option:
 buyer pays seller option money to make
option binding on seller
 option money not refundable
 option money may be applied to
purchase price if buyer exercises option
 rental payments may be applied to
purchase (rent credit)
Lease/Options
Rental payments
Rent charged on lease/option is often higher
than rent under ordinary lease.
 Gives optionee incentive to exercise
option quickly.
 Provides compensation to optionor for
uncertainty of outcome.
 Permits a lender at the exercise of the
option to credit excess toward down
payment.
Lease/Options
Rent credit
Three ways rent credit can be applied to
purchase:
 applied to down payment
 deducted from sales price
 applied toward closing costs/prepaids
Lease/Options
Provisions of lease/option agreement
Lease/option should:
 include all terms of lease
 include all terms of potential purchase
contract
 state that option money is not security deposit
 state that option rights are forfeited if tenant
defaults on lease
 state that option money is forfeited if
purchase is not consummated by buyer
Lease Arrangements
Lease/purchase
Lease/Purchase: purchase contract allows
buyer to lease property for extended period
before closing.
 Parties sign purchase agreement (not
option) along with lease.
 Tenant/buyer provides good faith deposit
instead of option money.
 Closing date set quite far off; buyer rents
property in meantime.
Lease Arrangements
Lease/purchase
If tenant/buyer decides not to buy property,
good faith deposit is forfeited.
 Tenant/buyer probably more committed
with lease/purchase contract than with
lease/option.
 Eventual sale more likely.
Agent Responsibilities
Real estate agent should:
 make sure both parties understand seller
financing arrangement
 encourage both to consult lawyers or
CPAs
 never prepare seller financing documents
Agent Responsibilities
Disclosures
Seller financing disclosure:
 required in some states when agent
helps arrange seller financing
 discloses all financing terms
 informs seller of buyer’s financial
situation
Agent Responsibilities
Disclosures
Good idea to use disclosure statement even if
not required by state law.
 Provides information to parties.
 Protects agent by documenting that
certain information was provided.
Agent Responsibilities
Liability
Disclosure statement does not completely
shield agent from liability.
 Breach of fiduciary duties.
 Inadvertent dual agency.
RELE 1319 Chapter 13

Más contenido relacionado

La actualidad más candente

Remedies for breach
Remedies for breachRemedies for breach
Remedies for breachsheikhjee
 
Blank sales agreement
Blank sales agreementBlank sales agreement
Blank sales agreementieyra Athirah
 
Types of islamic banking
Types of islamic bankingTypes of islamic banking
Types of islamic bankingBusines
 
BUS 115 Chap013 sales contracts - formation, title, risk of loss
BUS 115 Chap013   sales contracts - formation, title, risk of lossBUS 115 Chap013   sales contracts - formation, title, risk of loss
BUS 115 Chap013 sales contracts - formation, title, risk of lossneogenesis6
 
31132115 bank-guarantee
31132115 bank-guarantee31132115 bank-guarantee
31132115 bank-guaranteebidyut007
 
Chapter 22 – Remedies for Breach of Sales Contracts
Chapter 22 – Remedies for Breach of Sales ContractsChapter 22 – Remedies for Breach of Sales Contracts
Chapter 22 – Remedies for Breach of Sales ContractsUAF_BA330
 
Re max results buyers guide
Re max results buyers guideRe max results buyers guide
Re max results buyers guideChris Lockard
 
Unpaidsellerbusinesslaw 111117102757-phpapp01
Unpaidsellerbusinesslaw 111117102757-phpapp01Unpaidsellerbusinesslaw 111117102757-phpapp01
Unpaidsellerbusinesslaw 111117102757-phpapp01Vish Vishnu V Menon
 
Mortgage Pledge Hypothetication Lien Charge(1st and 2nd Charge) Fixed & float...
Mortgage Pledge Hypothetication Lien Charge(1st and 2nd Charge) Fixed & float...Mortgage Pledge Hypothetication Lien Charge(1st and 2nd Charge) Fixed & float...
Mortgage Pledge Hypothetication Lien Charge(1st and 2nd Charge) Fixed & float...Sameer Omles
 
Chapter 21 – Performance of Sales Contracts
Chapter 21 – Performance of Sales Contracts Chapter 21 – Performance of Sales Contracts
Chapter 21 – Performance of Sales Contracts UAF_BA330
 
Shortsales Power Point 1
Shortsales Power Point 1Shortsales Power Point 1
Shortsales Power Point 1BrokerDave
 
BBA-SEM-5-MERCANTILE LAW- Sales of goods act
BBA-SEM-5-MERCANTILE LAW- Sales of goods actBBA-SEM-5-MERCANTILE LAW- Sales of goods act
BBA-SEM-5-MERCANTILE LAW- Sales of goods actKU Open Source Education
 
Buyers Advice - Transfer of property (Revised)
Buyers Advice - Transfer of property (Revised)Buyers Advice - Transfer of property (Revised)
Buyers Advice - Transfer of property (Revised)Ricton Properties
 
Foreclosure & Home Ownership 4 17 2008
Foreclosure & Home Ownership 4 17 2008Foreclosure & Home Ownership 4 17 2008
Foreclosure & Home Ownership 4 17 2008EGDunn
 

La actualidad más candente (19)

Remedies for breach
Remedies for breachRemedies for breach
Remedies for breach
 
Blank sales agreement
Blank sales agreementBlank sales agreement
Blank sales agreement
 
Types of islamic banking
Types of islamic bankingTypes of islamic banking
Types of islamic banking
 
BUS 115 Chap013 sales contracts - formation, title, risk of loss
BUS 115 Chap013   sales contracts - formation, title, risk of lossBUS 115 Chap013   sales contracts - formation, title, risk of loss
BUS 115 Chap013 sales contracts - formation, title, risk of loss
 
Equity share advantages
Equity share advantagesEquity share advantages
Equity share advantages
 
31132115 bank-guarantee
31132115 bank-guarantee31132115 bank-guarantee
31132115 bank-guarantee
 
Chapter 22 – Remedies for Breach of Sales Contracts
Chapter 22 – Remedies for Breach of Sales ContractsChapter 22 – Remedies for Breach of Sales Contracts
Chapter 22 – Remedies for Breach of Sales Contracts
 
Re max results buyers guide
Re max results buyers guideRe max results buyers guide
Re max results buyers guide
 
ASSET SALE AGREEMENT
ASSET SALE AGREEMENT ASSET SALE AGREEMENT
ASSET SALE AGREEMENT
 
Unpaidsellerbusinesslaw 111117102757-phpapp01
Unpaidsellerbusinesslaw 111117102757-phpapp01Unpaidsellerbusinesslaw 111117102757-phpapp01
Unpaidsellerbusinesslaw 111117102757-phpapp01
 
Mortgage Pledge Hypothetication Lien Charge(1st and 2nd Charge) Fixed & float...
Mortgage Pledge Hypothetication Lien Charge(1st and 2nd Charge) Fixed & float...Mortgage Pledge Hypothetication Lien Charge(1st and 2nd Charge) Fixed & float...
Mortgage Pledge Hypothetication Lien Charge(1st and 2nd Charge) Fixed & float...
 
Shipping Finance
Shipping FinanceShipping Finance
Shipping Finance
 
Chapter 21 – Performance of Sales Contracts
Chapter 21 – Performance of Sales Contracts Chapter 21 – Performance of Sales Contracts
Chapter 21 – Performance of Sales Contracts
 
Shortsales Power Point 1
Shortsales Power Point 1Shortsales Power Point 1
Shortsales Power Point 1
 
BBA-SEM-5-MERCANTILE LAW- Sales of goods act
BBA-SEM-5-MERCANTILE LAW- Sales of goods actBBA-SEM-5-MERCANTILE LAW- Sales of goods act
BBA-SEM-5-MERCANTILE LAW- Sales of goods act
 
Three mortgage scams
Three mortgage scamsThree mortgage scams
Three mortgage scams
 
Transfer Of Property
Transfer Of PropertyTransfer Of Property
Transfer Of Property
 
Buyers Advice - Transfer of property (Revised)
Buyers Advice - Transfer of property (Revised)Buyers Advice - Transfer of property (Revised)
Buyers Advice - Transfer of property (Revised)
 
Foreclosure & Home Ownership 4 17 2008
Foreclosure & Home Ownership 4 17 2008Foreclosure & Home Ownership 4 17 2008
Foreclosure & Home Ownership 4 17 2008
 

Similar a RELE 1319 Chapter 13

Understanding Short Sales
Understanding Short SalesUnderstanding Short Sales
Understanding Short SalesPeggy Santmyer
 
Foreclosure PreveSlide show: What you need to know about foreclosure prevention
Foreclosure PreveSlide show: What you need to know about foreclosure preventionForeclosure PreveSlide show: What you need to know about foreclosure prevention
Foreclosure PreveSlide show: What you need to know about foreclosure preventionKQED
 
HAFA: Sounds Simple, But The Devil Is In The Details
HAFA: Sounds Simple, But The Devil Is In The DetailsHAFA: Sounds Simple, But The Devil Is In The Details
HAFA: Sounds Simple, But The Devil Is In The DetailsNash Law Firm PLLC
 
Surety Bond 101
Surety Bond 101Surety Bond 101
Surety Bond 101mgolia
 
Main Street Capital Short Sale Agreement (V1 8.11.08)
Main Street Capital Short Sale Agreement (V1 8.11.08)Main Street Capital Short Sale Agreement (V1 8.11.08)
Main Street Capital Short Sale Agreement (V1 8.11.08)Paul Clark
 
Management of financial Serviecs
Management of financial ServiecsManagement of financial Serviecs
Management of financial ServiecsAjilal
 
Tools to Manage Credit Risk
Tools to Manage Credit RiskTools to Manage Credit Risk
Tools to Manage Credit Riskprashant12
 
Tools to Manage Credit Risk
Tools to Manage Credit RiskTools to Manage Credit Risk
Tools to Manage Credit Riskguestd508140
 
Chapter 54 Conventional financing on a sale, and the buyer’s .docx
Chapter 54 Conventional financing on a sale, and the buyer’s .docxChapter 54 Conventional financing on a sale, and the buyer’s .docx
Chapter 54 Conventional financing on a sale, and the buyer’s .docxrobertad6
 
Ed 2011-conventional-financing-add
Ed 2011-conventional-financing-addEd 2011-conventional-financing-add
Ed 2011-conventional-financing-addMatthew Rathbun
 
Eliot Lopian- Loan Origination And Processing In Real Estates
Eliot Lopian- Loan Origination And  Processing In Real EstatesEliot Lopian- Loan Origination And  Processing In Real Estates
Eliot Lopian- Loan Origination And Processing In Real EstatesEliot Lopian
 

Similar a RELE 1319 Chapter 13 (20)

Understanding Short Sales
Understanding Short SalesUnderstanding Short Sales
Understanding Short Sales
 
SPECIALISED FIANCIAL SERVICES FIN 426
SPECIALISED FIANCIAL SERVICES FIN 426SPECIALISED FIANCIAL SERVICES FIN 426
SPECIALISED FIANCIAL SERVICES FIN 426
 
Foreclosure PreveSlide show: What you need to know about foreclosure prevention
Foreclosure PreveSlide show: What you need to know about foreclosure preventionForeclosure PreveSlide show: What you need to know about foreclosure prevention
Foreclosure PreveSlide show: What you need to know about foreclosure prevention
 
HAFA: Sounds Simple, But The Devil Is In The Details
HAFA: Sounds Simple, But The Devil Is In The DetailsHAFA: Sounds Simple, But The Devil Is In The Details
HAFA: Sounds Simple, But The Devil Is In The Details
 
Surety Bond 101
Surety Bond 101Surety Bond 101
Surety Bond 101
 
Main Street Capital Short Sale Agreement (V1 8.11.08)
Main Street Capital Short Sale Agreement (V1 8.11.08)Main Street Capital Short Sale Agreement (V1 8.11.08)
Main Street Capital Short Sale Agreement (V1 8.11.08)
 
Short sales
Short salesShort sales
Short sales
 
Hire Purchase
Hire PurchaseHire Purchase
Hire Purchase
 
18BCO23C-U5.pdf
18BCO23C-U5.pdf18BCO23C-U5.pdf
18BCO23C-U5.pdf
 
Management of financial Serviecs
Management of financial ServiecsManagement of financial Serviecs
Management of financial Serviecs
 
Tools to Manage Credit Risk
Tools to Manage Credit RiskTools to Manage Credit Risk
Tools to Manage Credit Risk
 
Tools to Manage Credit Risk
Tools to Manage Credit RiskTools to Manage Credit Risk
Tools to Manage Credit Risk
 
Respa Training 1 05 10
Respa Training 1 05 10Respa Training 1 05 10
Respa Training 1 05 10
 
Chapter 54 Conventional financing on a sale, and the buyer’s .docx
Chapter 54 Conventional financing on a sale, and the buyer’s .docxChapter 54 Conventional financing on a sale, and the buyer’s .docx
Chapter 54 Conventional financing on a sale, and the buyer’s .docx
 
Factoring
Factoring Factoring
Factoring
 
Ed 2011-conventional-financing-add
Ed 2011-conventional-financing-addEd 2011-conventional-financing-add
Ed 2011-conventional-financing-add
 
Short Sales
Short SalesShort Sales
Short Sales
 
The Short Sale Process
The Short Sale ProcessThe Short Sale Process
The Short Sale Process
 
Long Term Financing
Long Term FinancingLong Term Financing
Long Term Financing
 
Eliot Lopian- Loan Origination And Processing In Real Estates
Eliot Lopian- Loan Origination And  Processing In Real EstatesEliot Lopian- Loan Origination And  Processing In Real Estates
Eliot Lopian- Loan Origination And Processing In Real Estates
 

Último

Philosophy of Education and Educational Philosophy
Philosophy of Education  and Educational PhilosophyPhilosophy of Education  and Educational Philosophy
Philosophy of Education and Educational PhilosophyShuvankar Madhu
 
In - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxIn - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxAditiChauhan701637
 
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptx
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptxPractical Research 1: Lesson 8 Writing the Thesis Statement.pptx
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptxKatherine Villaluna
 
Practical Research 1 Lesson 9 Scope and delimitation.pptx
Practical Research 1 Lesson 9 Scope and delimitation.pptxPractical Research 1 Lesson 9 Scope and delimitation.pptx
Practical Research 1 Lesson 9 Scope and delimitation.pptxKatherine Villaluna
 
Diploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfDiploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfMohonDas
 
The Singapore Teaching Practice document
The Singapore Teaching Practice documentThe Singapore Teaching Practice document
The Singapore Teaching Practice documentXsasf Sfdfasd
 
Education and training program in the hospital APR.pptx
Education and training program in the hospital APR.pptxEducation and training program in the hospital APR.pptx
Education and training program in the hospital APR.pptxraviapr7
 
How to Make a Field read-only in Odoo 17
How to Make a Field read-only in Odoo 17How to Make a Field read-only in Odoo 17
How to Make a Field read-only in Odoo 17Celine George
 
HED Office Sohayok Exam Question Solution 2023.pdf
HED Office Sohayok Exam Question Solution 2023.pdfHED Office Sohayok Exam Question Solution 2023.pdf
HED Office Sohayok Exam Question Solution 2023.pdfMohonDas
 
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptxSandy Millin
 
The Stolen Bacillus by Herbert George Wells
The Stolen Bacillus by Herbert George WellsThe Stolen Bacillus by Herbert George Wells
The Stolen Bacillus by Herbert George WellsEugene Lysak
 
M-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxM-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxDr. Santhosh Kumar. N
 
How to Manage Cross-Selling in Odoo 17 Sales
How to Manage Cross-Selling in Odoo 17 SalesHow to Manage Cross-Selling in Odoo 17 Sales
How to Manage Cross-Selling in Odoo 17 SalesCeline George
 
Benefits & Challenges of Inclusive Education
Benefits & Challenges of Inclusive EducationBenefits & Challenges of Inclusive Education
Benefits & Challenges of Inclusive EducationMJDuyan
 
AUDIENCE THEORY -- FANDOM -- JENKINS.pptx
AUDIENCE THEORY -- FANDOM -- JENKINS.pptxAUDIENCE THEORY -- FANDOM -- JENKINS.pptx
AUDIENCE THEORY -- FANDOM -- JENKINS.pptxiammrhaywood
 
Quality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICEQuality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICESayali Powar
 
Clinical Pharmacy Introduction to Clinical Pharmacy, Concept of clinical pptx
Clinical Pharmacy  Introduction to Clinical Pharmacy, Concept of clinical pptxClinical Pharmacy  Introduction to Clinical Pharmacy, Concept of clinical pptx
Clinical Pharmacy Introduction to Clinical Pharmacy, Concept of clinical pptxraviapr7
 
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptxPISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptxEduSkills OECD
 

Último (20)

Philosophy of Education and Educational Philosophy
Philosophy of Education  and Educational PhilosophyPhilosophy of Education  and Educational Philosophy
Philosophy of Education and Educational Philosophy
 
In - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptxIn - Vivo and In - Vitro Correlation.pptx
In - Vivo and In - Vitro Correlation.pptx
 
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptx
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptxPractical Research 1: Lesson 8 Writing the Thesis Statement.pptx
Practical Research 1: Lesson 8 Writing the Thesis Statement.pptx
 
Practical Research 1 Lesson 9 Scope and delimitation.pptx
Practical Research 1 Lesson 9 Scope and delimitation.pptxPractical Research 1 Lesson 9 Scope and delimitation.pptx
Practical Research 1 Lesson 9 Scope and delimitation.pptx
 
Diploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdfDiploma in Nursing Admission Test Question Solution 2023.pdf
Diploma in Nursing Admission Test Question Solution 2023.pdf
 
The Singapore Teaching Practice document
The Singapore Teaching Practice documentThe Singapore Teaching Practice document
The Singapore Teaching Practice document
 
Education and training program in the hospital APR.pptx
Education and training program in the hospital APR.pptxEducation and training program in the hospital APR.pptx
Education and training program in the hospital APR.pptx
 
How to Make a Field read-only in Odoo 17
How to Make a Field read-only in Odoo 17How to Make a Field read-only in Odoo 17
How to Make a Field read-only in Odoo 17
 
HED Office Sohayok Exam Question Solution 2023.pdf
HED Office Sohayok Exam Question Solution 2023.pdfHED Office Sohayok Exam Question Solution 2023.pdf
HED Office Sohayok Exam Question Solution 2023.pdf
 
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
2024.03.23 What do successful readers do - Sandy Millin for PARK.pptx
 
Finals of Kant get Marx 2.0 : a general politics quiz
Finals of Kant get Marx 2.0 : a general politics quizFinals of Kant get Marx 2.0 : a general politics quiz
Finals of Kant get Marx 2.0 : a general politics quiz
 
The Stolen Bacillus by Herbert George Wells
The Stolen Bacillus by Herbert George WellsThe Stolen Bacillus by Herbert George Wells
The Stolen Bacillus by Herbert George Wells
 
M-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptxM-2- General Reactions of amino acids.pptx
M-2- General Reactions of amino acids.pptx
 
Personal Resilience in Project Management 2 - TV Edit 1a.pdf
Personal Resilience in Project Management 2 - TV Edit 1a.pdfPersonal Resilience in Project Management 2 - TV Edit 1a.pdf
Personal Resilience in Project Management 2 - TV Edit 1a.pdf
 
How to Manage Cross-Selling in Odoo 17 Sales
How to Manage Cross-Selling in Odoo 17 SalesHow to Manage Cross-Selling in Odoo 17 Sales
How to Manage Cross-Selling in Odoo 17 Sales
 
Benefits & Challenges of Inclusive Education
Benefits & Challenges of Inclusive EducationBenefits & Challenges of Inclusive Education
Benefits & Challenges of Inclusive Education
 
AUDIENCE THEORY -- FANDOM -- JENKINS.pptx
AUDIENCE THEORY -- FANDOM -- JENKINS.pptxAUDIENCE THEORY -- FANDOM -- JENKINS.pptx
AUDIENCE THEORY -- FANDOM -- JENKINS.pptx
 
Quality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICEQuality Assurance_GOOD LABORATORY PRACTICE
Quality Assurance_GOOD LABORATORY PRACTICE
 
Clinical Pharmacy Introduction to Clinical Pharmacy, Concept of clinical pptx
Clinical Pharmacy  Introduction to Clinical Pharmacy, Concept of clinical pptxClinical Pharmacy  Introduction to Clinical Pharmacy, Concept of clinical pptx
Clinical Pharmacy Introduction to Clinical Pharmacy, Concept of clinical pptx
 
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptxPISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
PISA-VET launch_El Iza Mohamedou_19 March 2024.pptx
 

RELE 1319 Chapter 13

  • 1. Financing Residential Real Estate Lesson 13: Seller Financing
  • 2. Introduction This lesson will cover:  how seller financing works  why seller financing is used  forms of seller financing  alternatives to seller financing  agent’s responsibilities in seller-financed transactions
  • 3. How Seller Financing Works Two ways for seller to finance buyer’s purchase:  purchase money loan  land contract
  • 4. How Seller Financing Works Mortgage or deed of trust  Seller is extending credit to buyer, not providing loan funds.  Buyer makes installment payments to seller.  Seller is mortgagee or beneficiary, with right to foreclose in case of default.
  • 5. How Seller Financing Works Contract for Deed Buyer (vendee) takes possession of property, but seller (vendor) retains title until contract price paid in full.  Alternative to a lien.  Seller extends credit to buyer.
  • 6. How Seller Financing Works Seller financing may be:  primary financing  seller is buyer’s main or only source of financing for purchase  secondary financing (seller second)  supplements primary loan from institutional lender  covers part of downpayment or closing costs required for primary loan
  • 7. How Seller Financing Works Choosing finance instrument Seller generally decides which type of finance instrument  Real estate lawyer should prepare/review.  Deed of trust: trustee must be appointed.
  • 8. Why Seller Financing is Used Seller financing can:  attract buyers when interest rates are high  help buyer qualify for institutional loan  enable seller to charge higher price  provide tax benefits to seller
  • 9. Why Seller Financing is Used Seller financing:  seller isn’t bound by institutional policies regarding yields, loan-to-value ratios, or qualifying standards  not an option for seller who needs to be cashed out quickly
  • 10. Seller Seconds Seller second:  buyer paying most of purchase price with institutional loan  seller accepts second mortgage for remainder
  • 11. Seller Seconds Supplementing a new loan Seller second supplementing new institutional loan must meet institutional lender’s standards. Combined loan to value (CLTV) Credit Income and debt ratios Assets (including reserves) Terms
  • 12. Supplementing New Loan Buyer’s situation Factors in buyer’s financial situation may shape design of seller second:  funds available for down payment  buyer’s qualifying for total monthly payment  interest rate  balloon payment
  • 13. Supplementing New Loan Buyer’s situation May be easy to refinance seller second with balloon payment if:  property has appreciated substantially  interest rates are low But if interest rates are high or property has lost value, refinancing could be difficult.
  • 14. Supplementing New Loan Seller’s situation Seller’s evaluation of second:  cash at closing  monthly income  timing of payoff (balloon payment)  yield on investment  tax consequences  lien priority
  • 15. Seller Seconds Supplementing an assumption Seller second can supplement buyer’s assumption of seller’s existing mortgage.  Buyer makes payments on seller second to seller.  Buyer takes over monthly payments on seller’s existing mortgage.
  • 16. Seller Seconds Supplementing an assumption Assumption only possible if:  existing mortgage doesn’t have due-onsale clause, or  lender agrees to assumption.  Needed to release seller from liability.  Usual underwriting standards to evaluate buyer assuming loan.
  • 17. Seller Financing as Primary Loan Unencumbered property Seller financing is most flexible when seller has clear title to property.  Buyer and seller negotiate price and terms  Buyer may need less cash  May not have discount points or origination fees  Lower closing costs
  • 18. Unencumbered Property Protecting seller’s security First lien position if finance instruments are recorded. Seller should still be concerned with:  property taxes  special assessment liens  hazard insurance
  • 19. Unencumbered Property Protecting seller’s security Failure to pay taxes or insure property should be grounds for default under the finance instrument.  Seller can require impound account.  If not, seller should require proof be sent to him.
  • 20. Unencumbered Property Institutional second Buyer might want to supplement seller financing with secondary financing from lender.  Seller should investigate terms of proposed second loan before agreeing to transaction.  Can buyer afford monthly payments on both loans?  Does second have provisions that make default likely?
  • 21. Unencumbered Property Contract for deed Seller may choose to use a contract for deed instead of mortgage or deed of trust. Also known as:  land contract  bond for deed  conditional sales contract  installment sales contract  installment land contract  real estate contract
  • 22. Contract for deed How contract for deed works Seller (vendor) keeps title to property until buyer (vendee) pays off entire purchase price in installments.  Legal title: vendor’s title during contract term.  Equitable title: right of vendee to possess and enjoy property.
  • 23. Contract for deed How contract for deed works Contract:  not accompanied by promissory note  states all terms of sale and financing arrangement between vendor and vendee  should always be recorded
  • 24. Contract for deed Remedies for breach of contract Forfeiture: penalty if vendee breaches contract.  Vendee’s rights in property are terminated.  Payments may be kept by vendor as liquidated damages.  Vendor may retake possession of property immediately.
  • 25. Contract for deed Remedies for breach of contract In Texas, repossession not allowed 40% of the amount owed OR has made 48 monthly payments Trustee must be used to sell property instead
  • 26. Contract for deed Remedies for breach of contract Vendee refusing to leave means legal action to clear title and remove vendee from property.  Drawback for vendor: may take months.
  • 27. Contract for deed Remedies for breach of contract Judge may:  enforce contract as written  give vendee time to pay off contract balance  allow vendee to reinstate contract by paying delinquent payments plus interest  order sheriff’s sale of property
  • 28. Contract for deed Advantages and disadvantages Advantages for vendor:  legal owner until contract paid in full  may reacquire property in event of default
  • 29. Contract for deed Advantages and disadvantages Disadvantages for vendor:  delay and expense of court proceedings  uncertainty of trial results
  • 30. Contract for deed Advantages and disadvantages Advantages for vendee:  slow court proceedings
  • 31. Contract for deed Advantages and disadvantages Disadvantages for vendee:  vendor remains legal owner  judgments against vendor might cloud interest  uncertainty of court decision
  • 32. Contract for deed Using a contract for deed Lenders generally don’t permit financing to vendees due to the nature of the ownership Two possible solutions:  Vendor agrees to have property stand as security for institutional loan.  Vendee could mortgage his equitable interest in property.
  • 33. Contract for deed Using a contract for deed Vendor agrees to have property stand as security for institutional loan.  Vendor doesn’t assume personal responsibility for repayment.  Lender can foreclose on property but can’t sue vendor for deficiency.
  • 34. Seller Financing as Primary Loan Encumbered property Seller of encumbered property can’t afford to pay off existing mortgage at closing.  Seller second was one alternative.  Wraparound financing is another alternative.
  • 35. Encumbered Property Wraparound financing Wraparound financing:  property remains subject to underlying loan  buyer does not assume underlying loan  seller remains responsible for payments  buyer makes monthly payments to seller  seller uses part of buyer’s payment to make payment on underlying loan
  • 36. Wraparound Financing Choice of finance instrument For wraparound, seller can use:  mortgage  deed of trust  contract for deed Deed of trust used for wrap: all-inclusive trust deed.
  • 37. Wraparound Financing Underlying loan: no due-on-sale clause Wraparound financing is only proper if underlying loan doesn’t have due-on-sale clause and lender approves of it.  Silent wrap: without lender’s consent.
  • 38. Wraparound Financing Compared with assumption + second If seller’s existing loan has no due-on-sale clause, parties can choose between:  assumption plus seller second  buyer gets benefit of existing loan with below-market interest rate  wraparound  may give buyer below-market rate and seller above-market yield
  • 39. Wraparound Financing Seller’s yield Seller’s yield depends on:  amount of credit extended to buyer, and  difference between interest rate on wrap and rate on underlying loan. Credit extended is:  difference between wrap amount and balance on underlying loan  not full amount of wrap
  • 40. Wraparound Financing Seller’s yield Example: Sales price: $200,000 Downpayment: $20,000 Underlying loan: $150,000, balance at 6% interest Wraparound: $180,000 at 7.5% interest $180,000 Wrap financing for buyer – 150,000 Seller’s underlying loan balance $30,000 Credit extended to buyer
  • 41. Wraparound Financing Seller’s yield Example, cont. In first year:  Seller collects $13,500 in interest from buyer.  Seller pays $9,000 in interest on underlying loan.  Net interest to seller: $4,500. Net Interest ÷ Credit Extended = Seller’s Yield $4,500 ÷ $30,000 = 15%
  • 42. Wraparound Financing Protecting wraparound buyer To ensure seller makes payments on underlying loan:  provision in finance instrument requiring seller to make timely payments, and allowing buyer to pay lender directly if seller defaults  “Request for Notice of Delinquency”  escrow account managed by third party
  • 43. Alternatives to Seller Financing Seller can help with:  buydown  contribution to closing costs  equity exchange  lease/option  lease/purchase
  • 44. Alternatives to Seller Financing Buydowns Buydown: seller pays to reduce buyer’s interest rate on loan.  Seller proceeds are reduced by amount of buydown.  Buyer more easily affords lower payment and/or qualifies easier with lower DTI
  • 45. Alternatives to Seller Financing Contributions to closing costs Seller sometimes willing to make up shortfall when buyer doesn’t have enough money for closing costs.  Lenders impose limits on amounts.
  • 46. Alternatives to Seller Financing Equity exchanges Seller may be willing to accept other assets from buyer and reduce cash sales price.  Equity in vacant land or personal property.
  • 47. Alternatives to Seller Financing Lease arrangements Sometimes buyer wants to lease home before actually buying it.  Time to get cash for closing or downpayment.  Cannot currently qualify for loan.
  • 48. Alternatives to Seller Financing Lease arrangements Seller can lease property to prospective buyer in one of two ways:  lease/option arrangement  lease/purchase arrangement
  • 49. Lease Arrangements Lease/options Lease/Option: lease agreement includes option to purchase.  Seller leases property to buyer for term.  Buyer granted option to purchase property at certain price during lease term.  Seller = Landlord/Optionor  Buyer = Tenant/Optionee
  • 50. Lease Arrangements Lease/options Lease/option:  buyer has no obligation to buy  seller can’t sell property during option period  can be used even if seller’s loan has due-on-sale clause
  • 51. Lease/Options How lease/option works Lease/option:  buyer pays seller option money to make option binding on seller  option money not refundable  option money may be applied to purchase price if buyer exercises option  rental payments may be applied to purchase (rent credit)
  • 52. Lease/Options Rental payments Rent charged on lease/option is often higher than rent under ordinary lease.  Gives optionee incentive to exercise option quickly.  Provides compensation to optionor for uncertainty of outcome.  Permits a lender at the exercise of the option to credit excess toward down payment.
  • 53. Lease/Options Rent credit Three ways rent credit can be applied to purchase:  applied to down payment  deducted from sales price  applied toward closing costs/prepaids
  • 54. Lease/Options Provisions of lease/option agreement Lease/option should:  include all terms of lease  include all terms of potential purchase contract  state that option money is not security deposit  state that option rights are forfeited if tenant defaults on lease  state that option money is forfeited if purchase is not consummated by buyer
  • 55. Lease Arrangements Lease/purchase Lease/Purchase: purchase contract allows buyer to lease property for extended period before closing.  Parties sign purchase agreement (not option) along with lease.  Tenant/buyer provides good faith deposit instead of option money.  Closing date set quite far off; buyer rents property in meantime.
  • 56. Lease Arrangements Lease/purchase If tenant/buyer decides not to buy property, good faith deposit is forfeited.  Tenant/buyer probably more committed with lease/purchase contract than with lease/option.  Eventual sale more likely.
  • 57. Agent Responsibilities Real estate agent should:  make sure both parties understand seller financing arrangement  encourage both to consult lawyers or CPAs  never prepare seller financing documents
  • 58. Agent Responsibilities Disclosures Seller financing disclosure:  required in some states when agent helps arrange seller financing  discloses all financing terms  informs seller of buyer’s financial situation
  • 59. Agent Responsibilities Disclosures Good idea to use disclosure statement even if not required by state law.  Provides information to parties.  Protects agent by documenting that certain information was provided.
  • 60. Agent Responsibilities Liability Disclosure statement does not completely shield agent from liability.  Breach of fiduciary duties.  Inadvertent dual agency.