How to Structure a Seller Financing Deal?

[Andrew N.]

I was wondering if there was a definitive article/blog/forum post that summed up the exact process for creating a seller finance deal. I've searched the forums and there are a number of "Pro/Con" type articles but fewer with details on how to actually structure the deal. I realize the deal can be as complex or simple as you want but I was hoping to get a list of best practices or pitfalls in terms of setting up the terms. Basically is there an A to Z process other than just "consult with a real estate attorney"?

Also are there any good threads that outline the advantages of deferring Capital Gains Tax using an Installment Sale (Seller financing) for a low income retirement age seller?

In my case the default risk is assumed to be very close to zero with high credit individuals who are related to the seller.

Thanks in advance for any feedback.

[Bill Gulley]

Are you saying there is no book out there on the processing side of installment deals? Hmmmm???? LOL

How would we write that book?

A to Z, no, the application doesn't come first. Need to start with F, the personal financial needs of the seller. Another way is just to make an offer, bot that's under "O" :)

You're right, it depends, a listed property on the MLS through an agent would be different than talking in the kitchen to a FSBO.

Again, it's all about solving problems. There could be a thousand different problems, no, millions, they are as unique as the people are.

Yes, you can defer gains on the installment sale as the gain is received, a note can provide a good retirement income, I live off of several of them.

Before you can really do a seller financed note you need to know conventional financing as eventually, that's where you'll be.....unless you do a fully amortized loan and pay it off.

If you've been reading here you're aware of the regulatory issues, is the property and/or seller covered under the SAFE Act? If yes, you simply make the offer considering your sales pitch and take it to an attorney or a MO. You can't originate the loan.

If no, you can assist and present whatever, it still needs to be done in compliance with law as well as customs in your area to protect both buyer and seller, so how is your legal background? That's why I tell people to see an attorney.

As to the marketing side, again, it's about solving problems. I can make a note dance to any tempo, split principal amounts, interest rates, adjust or fix interest, have partial balloons or do other things that might be necessary to solve a problem.

You need to be seen as the expert in the room, you should be able to identify personal finance issues, estate matters, taxes, need for income and lump sum requirements, walking the seller through the alternatives and possibilities. Some sellers don't open up, but touching on the issues generally will let the seller see it's not all about you that you are addressing their side and that builds confidence.

The loan should be marketable for the seller....in most cases, but not all. If an elderly person may end up in a nursing home they could have asset issues to qualify for benefits. The note can be marketable and sold to pay for costs or, depending on state law, if the asset is not marketable it won't count in qualifications. So, again, how's your legal knowledge?

Assuming there are no issues that mess up the seller, you should include a loan package. Documents that show your ability to pay, tax returns, employment resume, business plan, whatever even if it's poor. Show some reasonable justification for making the loan. Ask a mortgage broker to run through the details of loan processing. The loan package doesn't need to be as a secondary market loan, but it would be better if it were, but this goes to the seller to hold. If they ever need to sell the note, they can show it to a note buyer to consider the deal along with other aspects they will look at. If there is a problem, such documentation may serve you in the justification of doing the deal and that can go either way.

After the qualification and processing stage you'll have a note and deed of trust. Again, a bit of a legal issue, putting a name in the wrong place, using the wrong word, making a term that is not in compliance can really cause problems in the future. Usually a title company has notes and they might prepare one, they can usually do the deed of trust, while I've never seen a good note from a title company, they may have one. But, whatever is common in your area.

Don't sign anything until you get to closing.

If there is any personal property involved you'll need a UCC filing at closing as well, the closing company will usually have them. The property needs to be mentioned in the note as well, it can be listed as an addendum as an inventory assigned as collateral. How's your legal training going (LOL).

For you first few deals, go see an attorney, protect yourself and the lender. After you see how things are done and what provisions are used, you might copy your stuff and use it again, if the deal is similar. It's really being penny wise and pound foolish to not use an attorney in your area, you're going on the hook for thousands of dollars and you want to save a couple hundred bucks! :)