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Seller Financing
By Jeff Riddell
It’s hard to get a mortgage these days. So, what’s a seller (and maybe the seller’s real estate agent) to do? Seller financing (sometimes called owner financing) may do the trick. Florida recognizes several approaches, each with its pros and cons.
First there is the traditional seller carry-back mortgage. The buyer and seller sign a purchase agreement that not only describes the purchase price, but also the seller financing covering a portion of the purchase price. Seller financing could, of course, cover the entire purchase price, but that usually isn’t prudent—sellers want buyers to have some skin in the game. The approach to seller financing may vary depending upon whether or not the seller already has a mortgage on the property.
Once the purchase agreement spells out the terms of the financing, the mortgage documents must be produced for the closing. These documents consist of a note (promissory note) and mortgage, and an amortization schedule if the loan is not interest only. Interest only is pretty self explanatory: interest is paid (usually on a monthly basis, but not necessarily), the principal amount stays constant during the term of the mortgage (unless there are partial prepayments), and on the loan maturity date, the principal balance is paid back to the seller. The mortgage is recorded in the public records following the deed from seller to buyer so that it is clear that the seller has sold the property to buyer, and that buyer owes seller a portion of the purchase price payable according to the terms of the note and mortgage. Homestead exemption is available to buyers who otherwise qualify.
Agreement for deed (sometimes called contract for deed) is another approach. Instead of the promissory note and mortgage, the buyer and seller enter into an agreement that says the seller has sold the property to the buyer, but that the buyer still owes part of the purchase price to seller. In states up north, these are sometimes referred to as land contracts. Although mortgages are almost always recorded, agreements for deed are often not recorded. If they are recorded, it is necessary to pay both deed documentary stamp tax on the sale price and both mortgage doc stamps and intangible tax on the balance owed. Some people think that an agreement for deed (especially an unrecorded agreement for deed) does not trigger a due on sale clause in seller’s underlying mortgage, but that’s not true (subject to the lender finding out about it of course). If the buyer fails to make the payments required under the agreement for deed, the seller must foreclose the agreement for deed just like a mortgage, unless the agreement is not recorded and the buyer just walks away, or if recorded, the buyer gives seller a quit claim deed. If the buyer pays off the agreement for deed as required, the seller then delivers the deed to the buyer. Homestead tax savings are not available to the buyer unless the agreement for deed is recorded.
The next approach is lease option or lease purchase. Although both the seller carry-back mortgage and recorded agreement for deed allow the buyer to claim normal home owner tax benefits, these two approaches postpone use of those benefits because the buyer is only a tenant until he closes and receives the deed from the seller. My last article touched on the lease option/lease purchase approach. Although tax benefits (including homestead exemption) are not available to the buyer, this approach may still be attractive to the buyer because he can tie up the home he wishes to purchase, postpone the actual purchase and live in it in the meantime. These do not trigger a due on sale clause in seller’s underlying mortgage.
There are many other nuances to all of these seller financing approaches which I don’t have room to cover here. Title companies cannot prepare these documents (other than maybe a simple note and mortgage) so you need a real estate attorney; but for the right situations these approaches can result in a sale where the buyer is unable to obtain his own financing, at least for now. An excellent payment history on any of these can help the buyer get the bank mortgage he needs to close out the seller financing.
Jefferson F. Riddell is a Florida Board Certified Real Estate Attorney with thirty-five years of experience assisting people with a variety of residential and commercial real estate matters. U.S. 1031 Exchange Services, Inc is a 1031 exchange qualified intermediary (QI) and a member of the Federation of Exchange Accommodators (FEA). As President of U.S. 1031 Exchange Services Jeff has been facilitating 1031 exchanges for more than twenty years. Jeff has been awarded the Certified Exchange Specialist (CES) certification. Jeff may be reached at 941-366-1300 or via email at jeff@us1031.com [2]. www.us1031.com [3].
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