Creative Finance Questions For New Investor

5 Replies

Hi bigger pockets family!

I have recently been trying to learn about creative finance (and real estate in general lol) so I'm pretty new to it all and had a couple questions about seller financing if anyone has any experience or knowledge in that area.

- When closing on an off market deal from start to finish who do you need on your team apart from the seller and buyer? If anyone could give a timeline too for when these team members come into place that would be incredible. I'm sure it can be different for every situation but an example would be nice to start filling out the puzzle in my head :)

- I'm sure this is a very easy question but being so new to real estate I'm not quite sure how this all works: With all the contracts that are involved in real estate including the purchase of sales agreement, where do you put these contracts to keep them safe and binding? Especially when not working with an agent. What is it like submitting an offer to a motivated seller when you are not working with an agent?

- Are these contracts electronic for the most part now and how do you manage the paperwork, is this where escrow comes into place?

- With seller financing, does ownership of property transfer to the buyer, does it not, or does it depend? If it does not, what are the ways to provide reassurance to the seller that the buyer won't fluke out on payments?

I know that was a lot but feel free to answer just one of these questions or any that you want. Thankyou guys for reading, I'm forever grateful for Bigger Pockets and its community.

Hi Abby! Congratulations on your upcoming purchase. Have you already negotiated a seller financing contract?

If this is new territory for you, I would strongly encourage getting a real estate professional on your team, be that a broker or an attorney. The legal and tax considerations of real estate contracts can be tremendous. Depending on your state (I am not familiar with Colorado), you will likely work with a title company or an escrow attorney to manage the critical closing documents and to consummate the sale.

There are a lot of contracts which are negotiated and enforced outside of the closing, related to the inspection, due diligence, surveys, appraisals, etc. If you aren't working with a real estate pro who is tracking these for you, you will need a secure system for storing these. Digital copies are only acceptable if the digital signing systems meet certain electronic signature requirements. Otherwise, keep your original wet-signed copies and guard them.

If you do happen to negotiate seller financing, you will absolutely want an attorney to draft/review the documents related to this private loan and also consult with your CPA. To answer your question, you will take ownership, even with private financing, however, there will be a recorded deed of trust in the name of the seller. If the seller is not financing the full purchase amount, you'll need to fully disclose this to an additional lender whom you engage with. There is certain positioning on the note that says who gets the first chance to foreclose in the event of default. Odds are an institutional lender will not be okay sitting in the second seat. Also, do not let the seller write a second contract nor side arrangement to help you get a mortgage for part of the purchase and seller carry for the rest. This is mortgage fraud.

In closing, engage the help of a professional. A good broker will negotiate their commission from the seller and your representation will be paid by the seller. I've been contacted by buyers before who executed contracts with sellers which were on personally drafted sales contracts, which stripped the buyers of their protections and heavily favored the seller. One such person ended up on the hook for all closing costs, her earnest money was non-refundable on day one, she signed away her right to ask for any inspection related repairs, and took possession of the property by quit claim deed. Scary stuff!

Wow thankyou @Adam Lendi for your quick and very detailed response!!

I have not yet negotiated a seller financing contract and am just trying to learn right now as much as possible so that I know what I need in place before I get started so your response was very helpful! I think the biggest thing I took from it was that I better get an amazing real estate professional on my team so I don't end up in a position like that one buyer. Scary stuff indeed. 

That would be a great start... or consider getting licensed yourself. If this is an area which interests you and in which you want to build your business, that would be a great way to get the knowledge and the tools.

If you need a connection with a great broker, let me know where it is you are investing and I will make a connection for you. I know a top performer in Cleveland, if that is where you are looking.

@Adam Lendi Getting licensed is definitely a consideration of mine and something I'll probably be looking into. And yes, I'm in the Cleveland market and will be investing here as well :) And thank you, that would be so awesome if you could connect me with the broker you know, I'd love to talk to him/her!