Creative Financing (Seller Finance)

[Austin Kuhnle]

Hey BP, I recently offered a purchase price to a homeowner. They seem really interested on going through the seller finance deal with me. One of her questions that I wasn't able to answer, and figured ask on BP first before doing my research. Her question was " Who will hold the deed"? I recently heard on podcast that me being the buyer i would have the deed. Just wanted to clarify. She was worried she would still be reliable for property taxes and insurance, etc. Hope that makes sense, and thanks BP!

[Jared Prevost]

@Austin Kuhnle

The process for deed transfer is almost the same as a standard closing for a cash as-is purchase. A title company will use your purchase contract to determine who gets paid out on the HUD and the deed will transfer to your name after the property closes.

The seller will get a first lien position on the property (unless there is existing bank financing in place, but that's a post for another time) and should also get added as an additional beneficiary on the insurance. The insurance piece is protection for the seller because if the house burns down or gets blown away in a storm, they can get paid out on the insurance rather. Otherwise, you would default on the note and the seller would get back a lot of land with no house on it! This doesn't cost any additional expense to your insurance bill either :)

The most important objection you need to address with seller finance is, "Well, what happens if you stop paying me or trash the house and disappear?". Essentially, the seller is asking, do I get screwed over if I trust you and you default?

The best way our team has found to address this is by stating what happens upon default in the purchase contract and giving the seller as much leverage as possible upon default. In other words, if we miss a payment you, Mr. Seller, get the property back, get to keep all the money we've given you so far, and can resell the house which has likely appreciated in value. How you legally structure this depends on the state and what the foreclosure process in that state. I would recommend reaching out to a real estate attorney to see what options you have (deed in lieu of foreclosure, etc).

If the seller sells via land contract, that is when there isn't a deed transfer at closing. Seller financing via a land contract looks a lot more like a car loan, the seller retains the title under the financing is paid off.