Closed an Owner Financing deal without a Purchase Agreement?

18 Replies

Hello Bigger Pockets Community!

I live in Las Vegas, and just purchased my next door neighbor's house. All our agreements were just verbal, and I had a Lawyer supposed to do the PA for me. I am the buyer, and most of the PA would actually be in my favor. 

However, being in a rush, we wanted to close the deal yesterday (Friday). I talked to my Lawyer, and she said that she wouldn't be able to do the PA until next week. She said, however, that being the buyer, if the seller agrees, we could indeed do the deed now (which we did yesterday), and that we would do the purchase agreement later. 

Today, her house is officially mine, and it's been recorded at the county. The deed shows a $210,000 purchase price. She only got $2,200 (for which I have a receipt) as a first part of the down payment. We agreed verbally that I would give her another $6k by November 1st. And that mortgage payments would start only in November 1st.

I would like to know, if we decide to actually just keep it as a verbal agreement, would that put me at any risk? or would that just mean that the seller has no security against me?

Also, if we decide to do the purchase agreement, would it be an issue if we notarize it, but don't record it? I'm asking because I assume that if we record it, that would put an official mortgage on the house, which could block me from pulling any equity from the house, if I ever want to use it to purchase a third house.

@Najy Lyoubi  This seems like insanity to me.  I'm not a lawyer, but this is frightening.

First of all, the Statute of Frauds requires that contracts above an minimal amount (normally about $500) be in writing.

Second, verbal contracts are binding, but not in real estate.  I believe that's the case in 50 states.

If it's recorded, you're in better shape than if it wasn't, but what if the seller raises a stink about some misunderstanding in your verbal contract - and puts a lien on the house?  What if she has seller's remorse and puts a lien on it?  What if she's dishonest and fabricates a claim about "our verbal agreement said [fill in the blank]" and uses it to screw you?  Or she claims that your monthly payments were something different that what you agreed to?

Did you do a title search?  Did you buy title insurance?  How do you know that she was actually the owner and not a tenant?

There are so many loose ends here that it's not funny. 

I think the smarter course of action would have been to tie the property up with an offer to purchase and then to hammer out the P&S when your attorney is available.

I hope it works out for you, but this seems reckless.  Get with your attorney ASAP.

Well, the owner has certainly gone out on a limb here.

There really is no need for a purchase agreement at this point....recording it is not the same as a mortgage. You now need a Note and a Mortgage document executed which spells out all the terms of the seller financed loan.  With a mtg, the seller has no collateral/security whatsoever.

Does the seller have an existing loan that you are wrapping?

So I did all my due diligence with a title company before hand, and the house had no mortgage and was paid off long time ago. However the house had liens from the trash company and the water company, and tax delinquencies. About $5,000 total, that I paid off right away.

I agree with @Wayne Brooks ... no need for a PSA at this point as the deal has closed. 

Your seller would be a total moron to not immediately secure the balance owed with a note which spells out the agreed payment terms as well as a recorded deed of trust/mortgage so she can foreclose if you default. If you can somehow get through this with only an unsecured note (after all, the seller can't just record a lien without your permission, despite what you see above), you would become a BP superstar.  Unfortunately, if you were to refuse after demand to execute a mortgage, my bet is you would be sued immediately... and lose.

Originally posted by @Tom Gimer :

I agree with @Wayne Brooks ... no need for a PSA at this point as the deal has closed. 

Your seller would be a total moron to not immediately secure the balance owed with a note which spells out the agreed payment terms as well as a recorded deed of trust/mortgage so she can foreclose if you default. If you can somehow get through this with only an unsecured note (after all, the seller can't just record a lien without your permission, despite what you see above), you would become a BP superstar.  Unfortunately, if you were to refuse after demand to execute a mortgage, my bet is you would be sued immediately... and lose.

this comes to mind unconscionable profiteering..

Elder abuse

the attorney who did this gets disbarred LOL.. 

as you state Tom judge ever saw this and bam this deal is unwound and this buyer gets hammered.

 

@Tom Gimer Thank you for your answer! 

@Casey Powers @Jay Hinrichs I am not trying to take advantage or steal the house from my neighbor. We know each other and came up with a verbal agreement that suits both of us. We ended up recording the deed before my lawyer could do the PA because I was running out of time, and wouldn't be available to do so in the next business days/weeks. And we did so, after my lawyer said it was fine.

We agreed on a great deal, and I certainly want her to get every single penny she deserves for the house she sold me. But since the deal is done, if the PA isn't needed anymore, then I don't see the point of spending money for that. Do we only need to sign and notarize a Promissory Note and we're done?

Originally posted by @Najy Lyoubi :

@Tom Gimer  Thank you for your answer! 

@Casey Powers @Jay Hinrichs I am not trying to take advantage or steal the house from my neighbor. We know each other and came up with a verbal agreement that suits both of us. We ended up recording the deed before my lawyer could do the PA because I was running out of time, and wouldn't be available to do so in the next business days/weeks. And we did so, after my lawyer said it was fine.

We agreed on a great deal, and I certainly want her to get every single penny she deserves for the house she sold me. But since the deal is done, if the PA isn't needed anymore, then I don't see the point of spending money for that. Do we only need to sign and notarize a Promissory Note and we're done?

what my rub was when you said you wanted to borrow against what is now your free and clear asset..  this is horrible .. you need to record a deed of trust in favor of your sweet neighbor which that needs to be notarized the NOTE does NOT need to be notarized does not hurt to do it but its not necessary.. its these kind of transactions that literally steal peoples homes and you could face criminal charges.. 

 

@Najy Lyoubi

I’ve had verbal agreements with my partner that went sideways about what to cook for dinner. But you’re doing $200k deals on a handshake? And your attorney was good with this?! I’m speechless.

I’m about to close on a duplex next week. The seller and I hashed out the deal over beers. Came to an agreement and shook hands. And then I went home and wrote up a Purchase Agreement. He could have changed his mind. Or me. No deals on verbals.

@Jay Hinrichs I never meant to say I wasn't going to pay her, and I didn't know that pulling equity from the house she sold me would be a crime. Again, my neighbor will get everything we agreed on, and if a deed of trust is needed, then we'll do it. I am not that kind of guy. 

We did this to help each other because she wanted a monthly income to be able to move out of Vegas, and I wanted a second property.

For the equity, I asked without bad intentions. I just thought that it would be easier for me, if I ever want to buy a third property. But now that you say that, I actually realize that it's not a good idea, since the bank could forclose the house on me while I still owe her money. Which would be really bad. So thank you for your comment.

So all I need is a Promissory Note and a Deed of Trust I guess.

Originally posted by @Najy Lyoubi :

@Jay Hinrichs I never meant to say I wasn't going to pay her, and I didn't know that pulling equity from the house she sold me would be a crime. Again, my neighbor will get everything we agreed on, and if a deed of trust is needed, then we'll do it. I am not that kind of guy. 

We did this to help each other because she wanted a monthly income to be able to move out of Vegas, and I wanted a second property.

For the equity, I asked without bad intentions. I just thought that it would be easier for me, if I ever want to buy a third property. But now that you say that, I actually realize that it's not a good idea, since the bank could forclose the house on me while I still owe her money. Which would be really bad. So thank you for your comment.

So all I need is a Promissory Note and a Deed of Trust I guess.

YUP that's all you need to be able to sleep well at night and know you have done the right thing.. but you can see how someone with a criminal bent could just walk away and the poor lady would be fubared. 

You need to do a financing agreement and a deed of trust to make this right. And preferably use a loan servicing company to track the payments etc. Borrowing on this property as if it's your free and clear property would be a huge no-no. Doing it the way you did, no matter your excuse, was shady. You didn't need to be here to get the deed transfer done at a later date. This is what mobile notaries and such are for. There was no good reason for rushing this person into signing over their property to you on just a handshake. I hope you do the right thing by her.

Originally posted by @Casey Powers :

You need to do a financing agreement and a deed of trust to make this right. And preferably use a loan servicing company to track the payments etc. Borrowing on this property as if it's your free and clear property would be a huge no-no. Doing it the way you did, no matter your excuse, was shady. You didn't need to be here to get the deed transfer done at a later date. This is what mobile notaries and such are for. There was no good reason for rushing this person into signing over their property to you on just a handshake. I hope you do the right thing by her.

I appreciate your detailed explanation, I will do so for sure. I should have the agreement and everything done by my lawyer by Monday afternoon, and we also agreed on using a loan servicing company, which I suggested to my neighbor, because she asked if I would pay her directly.

I really appreciate the help and knowledge I get from you guys and BiggerPockets.

Thanks again.


 

@Najy Lyoubi

There a right way to do this business . You couldn’t wait a week . Is the woman on a ventilator or something . There’s nothing to a sellers agreement or PA . So I don’t understand the big rush to circumvent the process

@Najy Lyoubi I applaud your honesty and the desire to do right It appears you did pay market value for the home.. If you record the DOT you will not be able to refinance for a number of years ,but there is no way around it without harm to the seller.

For your protection I would get title insurance now that the seller is still in town. The expense and extra paperwork  would  be worth it to  avoid future sale problems ..  I am curious what interest rate and term of the loan?  Good luck--


Originally posted by @Steven Picker:

@Najy Lyoubi I applaud your honesty and the desire to do right It appears you did pay market value for the home.. If you record the DOT you will not be able to refinance for a number of years ,but there is no way around it without harm to the seller.

For your protection I would get title insurance now that the seller is still in town. The expense and extra paperwork  would  be worth it to  avoid future sale problems ..  I am curious what interest rate and term of the loan?  Good luck--


Steve title companies these days can get real finicky about do it your self deeds and recordings unless the person is VERY well known to the title company..  

 

Originally posted by @Jay Hinrichs :
Originally posted by @Steven Picker:

@Najy Lyoubi I applaud your honesty and the desire to do right It appears you did pay market value for the home.. If you record the DOT you will not be able to refinance for a number of years ,but there is no way around it without harm to the seller.

For your protection I would get title insurance now that the seller is still in town. The expense and extra paperwork  would  be worth it to  avoid future sale problems ..  I am curious what interest rate and term of the loan?  Good luck--


Steve title companies these days can get real finicky about do it your self deeds and recordings unless the person is VERY well known to the title company..  

 Usually with an uninsured affidavit  it should be no problem ,but there can always be problems in the chain of title .. its easier to try it now that the seller is still around than later