Be Wary of Owner Financing for Real Estate Purchases
HOME LOANS, SHASTA COUNTY, TIPS FOR BUYERS
March 21st, 2009
The strained real estate market sales environment today has seen a resurgence 
of seller financing terms offered as an incentive to lure buyers to bite. Unlike decades ago when creative financing was common during tough economic times, today very few sellers are truly in a position to offer owner financing.
In the case where a property is owned outright, free of any loan liens, a seller can finance the purchase to a prospective purchaser. Likewise, if the seller has a small loan that will be paid in full at the time of sale using some or all of the buyers downpayment, the seller would again be in a position to carry the financing.
Of the 1544 listings on the Shasta MLS, 97 are offering owner financing. A closer look reveals many of these properties are encumbered with loans that are probably not assumable. Most loans originated since the late 1980’s require full assumption by a new buyer or are not assumable at all. Creative financing known as wrap-around loans or all-inclusive trust deeds can be risky for a buyer. Since most bank loans contain an acceleration clause, meaning the lender can call the entire loan due and payable upon title transfer, any creative attempts by a seller to wrap an existing loan without authorization from the existing lien holder, can trigger the bank to require the entire loan due and start foreclosure proceedings if the owner can’t pay off the loan.
The problem starts when a buyer tries to strike a deal with a seller using creative terms without realizing the legal implications the financing scenario can create. It’s possible the buyer will make a large downpayment, close escrow and then find out the lender has discovered their loan was wrapped with another loan without their written permission. This can trigger the acceleration of the loan. If the buyer can’t refinance and pay the lender off, the bank forecloses and the buyer loses any money invested.
Creative financing should be reviewed by an attorney and/or accountant to make certain the loan does not have any undisclosed consequences. Buyers should work with a reputable agent and seek legal advice if they don’t fully understand the loan terms. Any such loans arranged by a real estate licensee must be accompanied by a detailed financing disclosure statement which clearly addresses all terms and conditions of financing including:
- Interest rate
- Loan term
- Balloon payment due date and amount (if any)
- Monthly payment
- Late fee and grace period
- Loss payee clause on insurance
- Tax service
- Details of senior liens, if any
- Type of security instrument (deed of trust, all-inclusive, etc)
- Tax Id numbers for tax reporting purposes
- Prepayment penalty (if any)
- Recording of documents
- Title insurance
If you are considering buying real estate with owner financing, make sure you have someone looking out for your best interests. Contact me if you need assistance or have any questions.
The bottom line: If you see a property being represented as offering owner financing, ask if the property is free and clear of any liens. If so, proceed cautiously and make sure you have a real estate professional looking out for your interests. Contact me if I can help.
530-224-6767 or 530-941-7492
BRAD GARBUTT
REALTOR/BROKER ASSOCIATE
REAL ESTATE PROFESSIONALS GMAC
QUARTER CENTURY LOCAL REAL ESTATE EXPERIENCE
Great article Brad.Hopefully no one will get burned by that creative financing or that owner rate of 3% etc…
Best
Rick
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