Welcome to Real Deals! It’s always easier to learn from real life so here we share information from actual owner financed transactions. While a note and mortgage or deed of trust are the most common real estate financing documents, sometimes seller financing utilizes a Real Estate Contract.

The seller agreed to accept owner financing on a 20-acre land parcel in Iowa. The sales price was $50,000 with a $5,000 down payment made by the buyers at closing. The balance of $45,000 was carried back by the seller at the rate of 8% interest per annum with monthly payments of $377.00 for the next 240 months.

After receiving 6 monthly payments the seller was interested in receiving cash now for the remaining payments. The buyer had started building a home so the property now included water, electric, septic, foundation, and framing. These improvements increased the value and served as additional collateral should there ever be a default. The seller accepted an offer of $30,000 for the investor’s full purchase of the remaining 234 monthly payments.

When the seller originally sold the property to the buyer they utilized a Real Estate Contract. The seller remains vested in fee simple title until the buyer has made all contract payments in full. Once the seller receives the full principal balance plus interest, a warranty deed is delivered from the seller to the buyer transferring fee simple title into the buyer’s name.

With a mortgage or deed of trust the seller transfers the fee simple title to the buyer upfront at the time of closing (rather than at the end with a contract). The buyer then gives a lien back to the seller as evidenced by a note and mortgage or note and deed of trust.

Since the seller remains vested in title until payment in full on the Real Estate Contract, an investor would take on these same responsibilities. An investor must be certain the seller is holding clear title in order to accept the deed from the seller and hold it in trust until the buyer has paid in full. The investor also receives an owner’s policy rather than a mortgagee’s title policy from the title company upon purchasing the payments from the seller.

Real deals are based on actual transactions completed within the past ten years. Market conditions change frequently resulting in pricing and underwriting changes by note investors. Work with qualified professionals when creating new notes to obtain accurate and up-to-date pricing and investment parameters.

Before a note investor will pay cash to a seller for future payments, they perform what is called “due diligence”.  This is really just a fancy word for research.  You can simplify the process by being prepared for these common note investor requirements.

When an investor makes an offer to purchase a note, mortgage, deed of trust, or real estate contract, it is subject to underwriting and due diligence.   This enables the note investor to verify the information provided, analyze the risk, and confirm pricing. Here are the most common items requested prior to closing:

• Copies of legal documents (Settlement Statement, Note and Mortgage, or Deed of Trust, Contract, etc)
• Credit report on Payer/Buyer
• Current real estate taxes
• Proof of current hazard and fire insurance
• Payment history & verification of current balance
• Title Insurance Policy or Commitment
• Payoff statements for any property debts still owed by seller
• Current Property Value & Photos
• Payer Interview or Estoppel
• Additional items unique to the transaction

The seller usually starts the process by providing copies of the existing legal documents to the investor.  The investor will generally handle the remaining items, requesting additional information or document copies as necessary.

Many investors will cover the cost of due diligence, but policies can vary so be sure to verify. The option or purchase and sale agreement will outline this important information.