Process to follow for Owner Financing?

5 Replies

New to REI. Working on first deal. The seller is willing to carry the note in the property, but I don't know the steps I need to take to protect myself.

After we agree on terms and write it up into a contract, Do I just take the deal to the title company and pay the closing fees? Is there more to it?

I have gone to title agents for closing a seller financed deal, and also one of the seller's wanted to close at his lawyer's.  The title agency will draft up the terms into a contract.  You will want to do a title search, and an inspection, both of which protect you. 

You will line up an insurance policy and have that ready for your closing. 

If you plan on forming an entity, you want to go to a lawyer for that, too. Mine cost about $300 at the laywer's, which included the operating agreement. If you use an LLC, you want to fund a bank account in the name of the business. I use TD Bank, and considered PNC, just as an example.

Once you get close to the closing date, you will want to turn on power and water in your name or that of your entity.  

Originally posted by @Shane Miller :

New to REI. Working on first deal. The seller is willing to carry the note in the property, but I don't know the steps I need to take to protect myself.

After we agree on terms and write it up into a contract, Do I just take the deal to the title company and pay the closing fees? Is there more to it?

Most title companies can provide the basic documents, which are:

  1. Promissory Note - This is the promise to repay. It details the loan amount, note terms, payment schedule, late fees, etc. Not required, but good to attach an amortization table as an exhibit. Promissory notes are not recorded. 
  2. Mortgage - This pledges the property as collateral for the note. It also details the buyer's requirements to ensure taxes are kept current, maintain insurance, what constitutes a default, and what happens in event of a default. Some contain a "due on sale" clause which means the seller can call the full remaining balance due in the event of a transfer of title.
  3. Closing / Settlement Statement - Title companies prepare these for all types of transactions, but be sure yours shows the full purchase price, the down payment, and the beginning note balance.

After closing, I find it better for both parties when a licensed third party servicing or escrow company collects payments, issues annual tax statements, etc. 

Originally posted by @Shane Miller :

@Marco Bario

When you reference a ‘licensed third party’, what type of a business would this be? A bank? A lawyer?

There are many Loan Servicing Companies (FCI and Allied Servicing Corporation are two examples) that do nothing but service loans. Make sure the company you choose is licensed in the state where the property is located. Also many title or escrow companies provide this service. Some refer to it as "long-term escrow." 

The most you should expect to pay for basic loan servicing is less than $20/mo. It's not uncommon to split that fee with your borrower or negotiate for them to pay the full amount. 

Some servicers an upcharge for escrowing and disbursement of property taxes and insurance. I add to my loan docs that we will be escrowing and then have my servicer add the service.