Understanding Owner-Financed Real Estate Transactions

Owner-financed and “seller-financed” generally mean the same thing. Owner or seller financing is a substitute for obtaining a traditional mortgage from a lender to buy a property. Instead of a bank or mortgage company financing your purchase, the seller—the person from whom you are buying the property—will act as the bank or the lender.
You will sign a legally-binding contract with the seller to make the payments on the property. The lender will record the contract with the local property recording agency, as the bank would do for a mortgage.

Why Would a Buyer Want to Finance a Purchase This Way?

The most common reason a buyer would benefit from financing a real estate purchase this way is because the buyer is not able to qualify for traditional mortgage financing. Buyers can have difficulty when:

• Their credit score is not high enough or they can’t make a large enough down payment for a traditional lender.
• They have had a bankruptcy or foreclosure in the past and need to wait a few years to qualify for regular financing.
• They or their spouse are temporarily unemployed or have a pending job offer.

Also, depending upon whether the current market is a sellers’ or buyers’ market, buyers may be able to get a lower interest rate than they could with a traditional bank.

Why Would a Seller Offer to Finance Your Purchase?

Sometimes, in markets where interest rates are high, or there is too much housing inventory on the market, sellers find it difficult to sell their homes. Rather than continue to wait for markets to adjust or the perfect buyer to come along, sellers will offer to finance the sale for a certain time period. The seller benefits because:

• The seller can get the house sold sooner
• Sellers benefit because they collect the interest on the loan they make to the buyer
• The seller may be able to sell at a higher price and require a higher-than-market interest rate, knowing that you can’t obtain traditional financing

What Are the Risks?

Buyers take on more risk if they buy this way, rather than use a traditional mortgage to finance the purchase:

• If the buyer misses a payment or is late, you don’t have the same foreclosure protections that you’d have with bank mortgages.
• The seller can immediately call the loan due for breach of contract without going through traditional foreclosure proceedings
• Your landlord could evict you immediately
• If you have made any improvements to the property, you could lose any money you spent to make the improvements if you violate the terms of the loan
• In most situations, the seller can legally keep the entire amount of your down payment AND take back the house
• If the seller is paying a mortgage on the house, fails to pay it even after you make your payment, then you could lose the house for the seller’s default
• Title insurance will not cover every title or fraud issue
• You will likely be paying a higher price for the house in the long-run, a higher interest rate and make large monthly payments

Get Answers From a Knowledgeable Attorney

Before getting into any kind of seller-financed or “contract for deed” buying arrangement, please consult with us. It’s extremely important to us that no one takes advantage of you. It’s best if we can review your transaction before you sign anything. Contact us online for more information.

Commercial Real Estate Mistakes To Avoid

If you’re new to the commercial real estate world or are looking at your first investment property, here are some points to consider before signing on the dotted line. 

Whose Name Goes on the Commercial Real Estate Paperwork?

In most cases, your business should purchase commercial property in the business’s name, not your own name. You’ll protect yourself from liability should there be an accident on the property or a problem with the title. It’s best to speak with an attorney who is familiar with commercial real estate matters before making a final determination on whether your name or your business’s name should appear on the purchase agreement. 

What Was the Commercial Property Used for in the Past?

It’s extremely important to know the property’s history. What may look like a hip, tiny restaurant now may have been a gas station or environmentally-regulated, hazardous waste site. Perhaps the prior sale happened decades ago before certain regulations took effect, or the property was inherited, repurposed and reopened on top of a chemical hazard before current regulations were in place. An experienced attorney can help investigate the history and the title and clear the way for sale and financing.

Commercial Zoning and Licensing

Evaluate and investigate the permissible land use for a property. If you plan to keep any structures that are present on the property, you must understand if you are legally allowed to operate your type of business on this particular property. The zoning laws governing the property determine the proper use and occupancy.

Additionally, you can’t always just move your business into an empty building on the property after the closing. You may need a new occupancy license or permit to operate. 

Commercial Loan Applications and Underwriting

Even before you start your search, explore lending options with several lenders. It’s important to understand what your lender will require before applying for a loan to purchase your property. You should also know what amount you’ll qualify for, if the lender will restrict the kind or location of the property you buy, or impose other restrictions on the loan qualification process. 

You should also understand your short- and long-term expectations for a property. Create a budget and plan for your move up to a year ahead of time. Investigate your up-front and closing costs, monthly expenses, mortgage expenses and what you need to generate in income each month to cover these expenses. 

Location, Location, Location

This is the cardinal rule in any real estate purchase. Choosing the wrong location can spell disaster for your business if there is no traffic or for resale in the future. Your broker can help you analyze the factors that are important to your business to see if a specific property makes financial sense for you. Don’t buy on emotion. You should also consider the intangibles like: 

• Employee security and commuting distances
• Traffic patterns and neighborhood demographics
• Will customers come if they perceive that the neighborhood is not safe

Rely on Attorneys With Commercial Real Estate Experience

The most important thing you can do throughout the purchase process is to perform your due diligence on the entire transaction. Your broker or agent is knowledgeable, but not objective and independent from the sale or purchase. 

Work with an attorney with a history of commercial real estate experience for dedicated help. If you’re in Texas, we welcome you to reach out to us. Contact us as soon as possible to review your property’s details, title and history. 

3 Reasons to Use a Real Estate Attorney When Buying a Home

Buying a home is one of the biggest, most important purchases you’ll make during your lifetime. You’re investing a lot of money while committing to making monthly payments for up to 30 years. 

Before you sign on the dotted line, protect yourself. Make sure to involve one of our experienced real estate attorneys right from the start. 

3 Reasons to Hire an Attorney at the Outset of the Home Buying Journey

You’ll want to enjoy your home for many years to come without worrying about hidden legal and title problems that the seller should have disclosed. Here are three reasons to have a lawyer involved in a real estate transaction from the beginning: 

1. To Avoid Title Issues

Title issues come up in many contexts, including zoning and estate matters. However, some of the most common problems arise when:  

• A creditor filed a lien on the home against a seller, preventing the seller from selling the home
• The seller is divorced but the former spouse’s name is still on the deed
• Children inherit a property but not all of them agree to sell it, an attorney can help negotiate the purchase with the remaining siblings who inherited a share of the property. 

2. To Protect You When Buying a Foreclosed Property 

Buying a foreclosed property is attractive because there are many bargains to be found. Yet, the process is complex. Novice buyers can be on the hook for hidden fees and costs on a disaster of a property that is sold “as-is.” 

If you’ve never purchased a foreclosed property before, you’ll definitely want to involve a lawyer as soon as possible. A lawyer can explain the risks and benefits and protect your interests at the same time. The upside is that you can find a suitable, well-priced property after doing your due diligence and having a lawyer represent you. 

3. To Prevent Problems Before and After Closing

Even after a smooth closing, problems can come up. Real estate agents alone can’t always predict legal problems and aren’t trained to spot them. Most agents just want to get the deal done and closed on schedule. 

But what if you later discover a non-conforming addition, hazardous waste or your pre-closing inspection reveals a serious problem like radon or a serious rodent or snake infestation? Some agents will convince clients to allow sellers to “fix” a problem after the sale closes or adjust the price. 

We can be involved in your purchase from beginning to end. If you involve us early, you could save yourself a lot of time, aggravation and money later. 

A Lawyer Can Help Your Transaction Go More Smoothly

We are a trusted, full-service Dallas real estate law firm and have helped people buy and sell real estate for decades. Please email or call us at 214-760-6768 to learn about how we can help make your home purchase and closing go smoothly. 

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From Contract to Closing

You’ve found the house of your dreams and you can hardly wait for moving day! If you are a Real Estate Investor, the property is your next deal and you are looking forward to rehabbing and renting or selling. Either way, your excitement level is high and you’re ready to get started.

There are important steps to take before settling into the sofa in this new home and each one is very important and can have financial consequences.

1. Negotiate the contract with the seller. If your transaction involves a realtor, he or she will supply the contract and handle the negotiation. If you are buying a property directly from the owner, we suggest you involve a Real Estate Attorney to assist you with the negotiations.
2. Apply for funding. Immediately after the contract is negotiated, the buyer needs to make application at a reputable lender. Buyers will need to provide all necessary information to the lender such as income, assets, debts and credit history. In tight markets where houses are hard to find, it may be necessary to become approved for a loan before looking for a house so you can make an offer on the same day you find the one you want. The realtor will need to stay in constant contact with the lender regarding buyer’s application.
3. Fully evaluate the property. The contract has a provision for “termination options”. The buyer pays a negotiated amount for the number of days necessary to complete their due diligence. A complete inspection of the property, including a termite inspection, should be ordered and paid for by the buyer from an inspector deemed to be an expert. After reviewing the inspection report, the buyer(s) has a right to request that the seller(s) address all concerns they may have about the property, which may result in a renegotiation, or even a termination, of the contract.
4. Get the property appraised. The lender will require a property appraisal to make sure that its value is equal to or greater than the requested loan amount. The appraiser’s evaluation must prove that the property is worth at least as much as the buyer agreed to pay.
5. Wait on loan approval! When the lender has completed the due diligence and made a decision on the loan, the buyer will be notified. The buyer’s agent as well as the seller’s agent should work to ensure that the lender has all the documents necessary and that all steps are taken in the loan approval process in order to avoid a delay in the closing.
6. Select a title company, preferably one with a Board Certified Residential Real Estate Attorney, who will close the title or supervise the closing and has years of operational experience.

• The title company does a title search and determines that the real estate title is legitimate and whom the title is vested in, so the buyer can be confident that he or she is the legal owner of the real estate.
• This process includes searching for outstanding mortgages, judgments, liens, restrictions, leases, easements, unpaid taxes, or other encumbrances against the property that may affect ownership.
• The title company will strongly recommend to the buyer to purchase title insurance in case the title examiner or other party had made a mistake in the title search or in case there is some unknown issue back in the chain of title, such as a forgery, for example. This insurance is another level of protection. If the buyer chooses (or if the seller is contractually obligated) to purchase the title insurance for the property, the title company then issues a title insurance policy. This insurance protects the owner and/or lender from potential claims or lawsuits that may result over ownership disputes.
• Bring the following to the closing – valid photo id (driver’s license or passport), cashier’s check or certified check for the down payment and closing costs (never bring cash), proof of insurance, and the final purchase and sales contract. In case there is a small fee that was unanticipated, it is always a good idea to bring a blank personal check.
• Expect to sign these and other documents at the title closing. (a) Closing Disclosure or HUD-1 Settlement Statement (multiple pages), (b) Warranty Deed, and (c) title company requested documents.

7. Purchase homeowners’ insurance. If you are the intended homeowner, expect the lender to have pre-determined requirements. The seller’s agent should help the buyer ensure that proper coverage is purchased. If you are purchasing for cash or if you are a real estate investor, depending on the transaction, either you will purchase it or an end-buyer will acquire the insurance with you as an additional insured.
8. Transfer utilities. It is prudent for the buyer and seller to make arrangements for the utilities to be transferred to the buyer if necessary, usually upon the closing date. Buyers may need to make application to the various utility companies.

CONCLUSION

Purchasing a house for yourself or as an investor is much more than one big step! It is a series of important actions that must be completed in order to ensure that you will be the lawful owner of the property, take only a suitable financial risk in securing funding, and that the property is in good shape to mitigate big surprises after you take possession.

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© Gaylene Rogers Lonergan and Lonergan Law Firm, PLLC, 2017. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. The Lonergan Law Firm, PLLC, will represent you only after being retained and that agreement is made in writing.

Gaylene Rogers Lonergan | The Lonergan Law Firm, PLLC                                escrow2@lonerganlaw.com | 214-503-7509