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Sellers - Selling your home
Drawbacks of more popular seller financing concepts
Offering seller financing provides you with many benefits. However,
you should understand some of the pitfalls associated with the
more common forms of seller financing. The draw-backs and risks
assocaited with each are briefly discussed here.
Straight Lease
A rental for a specific period of time. Generally
incurs a negative cash-flow along with unrecoverable costs
of management, maintenance and vacancies. No chance for
elevated income.
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Lease Option (L/O)
A unilateral agreement to sell with bargain terms
at a future date.
So what's wrong with a Lease Option? They've been
done for years. The L/O violates a lender's due-on-sale
admonitions. A Lease Option can (if an option fee is taken
or rent credits given) lead to an inability to evict a
defaulting tenant. Such a tenant in default can claim
having "Equity" in the property, and in so doing, force
a judicial foreclosure process versus an eviction. This
can afford him/her months of free rent while the litigation
rages on. As well, terms can be changed on a whim relative
to buy-out provisions, repairs, equity credits (rent credits),
etc.: all requiring extensive, expensive, legal action
to rectify.
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Contract for Deed (CFD)
The Contract for Deed is essentially a "Lay Away
Plan." The property's legal title is relinquished to the
vendee (buyer) only after all debt has been paid off:
i.e., there is no legal ownership of the property until
it's completely paid for.
And the problems are...? The CFD is a direct violation
of a lender's due-on-sale clause; there is no means for
eviction; the vendee (resident/buyer) holds a "equitable"
interest in the property, allowing only for foreclosure,
ejectment and quite title in the event of a breach of
contract in lieu of eviction. Further, any parties' creditor
liens, lawsuits, judgments, marital dispute litigation
and tax liens attach to the property...and the death of
any party throws the property into probate.
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The "Wrap" - All Inclusive
Mortgage or All Inclusive Trust Deed (AITD)
In a "Wrap-Around Loan" a seller creates a mortgage
loan that is equal to or greater than the current loans
on the property. Then from the buyer's single monthly
payment to the seller the underlying junior loan payments
are made (usually leaving a positive cash flow for the
seller). .
So, what's wrong with that? Well, a Wrap violates
the lenders' due-on-sale clause; there is no means for
eviction in the event of default; the resident/buyer holds
an "equitable" interest, necessitating foreclosure, ejectment
and quite title actions in lieu of eviction; any parties'
creditor liens, lawsuits, judgments and tax liens attach
to the property; and the death of any party throws the
entire property into probate.
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The Equity Share (ES)
A shared-ownership of real estate, wherein two
or more parties hold title as tenants-in-common. Typically,
one of the parties makes the down payment while the other
lives in the property and makes the monthly payments.
So? And the problem is...? An Equity Share clearly
violates the mortgage lender's due-on-sale clause; there
is no means for eviction of an errant tenant/ buyer in
the face of default; the resident/buyer clearly holds
"Equity," thereby forcing judicial foreclosure, ejectment
and quiet title action in the event of a breach of contract
(versus eviction). Any party's liens, lawsuits, judgments,
marital dissolution litigation and tax liens attach to
the property... .and the death of any party puts property
into probate... quite possibly negatively affecting the
surviving party.
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The "Subject-To"
This is an assumption of mortgage payments subject
to a loan's existing terms.
And the problem...? "Subject-To" is basically
a generic term that can be applied to any of the above:
and like the above, a Subject-To violates the lender's
due-on-sale clause; obstructs (stops) one's right of eviction
of an errant tenant/buyer; it conveys Equity; it jeopardizes
title; it invites disastrous disagreement and litigation
between parties. And...any party's business, personal
and legal actions attach to the property: thereby seriously
negatively affecting the interests of the other party/ies.
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There is a better way!
You can still safely and legally offer seller
financing while avoiding most if not all of the risks
previously discussed. You can start by telling
us about your property. Let's see if it makes sense
for us to team up and work toward finding your best solution.
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