What Are the ACTUAL Steps in Structuring a Seller Financed Deal?

10 Replies

I have heard about 30 explanations of seller financing, but it seems that everyone's understanding or explanation leaves something to be desired...what are the actual steps?

1) Negotiate the deal

2) Negotiate Terms/Enter contract/ Open escrow

3) Title work

4) ....

5)....

What does the seller actually need to do to get the mortgage in place?...so, the deed transfers and then the seller has the ability to foreclose on the property if I cannot perform...how would that work?...

Medium grey red iconBrandon Sturgill, Hypothetical Insight, LLC. | [email protected] | 614‑379‑2017 | http://www.InvestHypothetical.com | OH Agent # 2015001666

Are you the seller or buyer?

1.  Identify deal.
2.  Negotiate/agree to terms
3.  Enter into contract
4.  Due diligence
5.  Close transaction / capitalize loan
6.  Properly record security instrument
7.  Board loan with a mortgage servicer
8.  On-going service of loan

What are the parts that are less than desirable?  

Originally posted by @Dion DePaoli :

1.  Identify deal.
2.  Negotiate/agree to terms
3.  Enter into contract
4.  Due diligence
5.  Close transaction / capitalize loan
6.  Properly record security instrument
7.  Board loan with a mortgage servicer
8.  On-going service of loan

What are the parts that are less than desirable?  

What type of contract do you use? How do you close the transaction? Are there any stipulations? How do you capitalize the loan? How do you record the security instrument? Who would you use as a mortgage servicer...and how would you accomplish that?..

Medium grey red iconBrandon Sturgill, Hypothetical Insight, LLC. | [email protected] | 614‑379‑2017 | http://www.InvestHypothetical.com | OH Agent # 2015001666

The contract is for the purchase and sale of the real property.  A standard RE contract works just fine.  As needed, an addendum can be added to specify the discussed and agreed to finance terms.  Some state template contracts have constructs for adding financing contingencies to them as a standard.  

The transaction closes like any other transaction.  A title company or title attorney can close the transaction and help with the issuance of title insurance, the handling of escrow funds and down payments along with ultimately recording the new deed and the security instrument (mortgage/deed of trust).  Any deed or security instrument is recorded by sending the document to the county recorder's office in the county of the subject property.

Any licensed mortgage servicer can be used.  Google it and you will find many to choose from.

Are there any stipulations?  Whatever is agreed to is agreed to.  If that agreement includes stipulations then "yes" there are.  It is a prudent practice to perform due diligence by both the buyer and the seller (if the seller is financing).  The ideas and concepts that that entails are vast and many.  Buyer looks into the property and the Seller/Finance looks into the credit worthiness of the borrower.  That is since the Seller presumably already knows about the property.  A stipulation example is requiring the borrower to bring 10% down.  So like any other loan on any other property the borrower has to bring the down payment gives it to the title/closing agent and it is applied to the borrower's account and reflected on the HUD1.  

The security instrument (mortgage/deed of trust) and the note should be drawn up by and attorney or reviewed by one.  If you go to a title company owned and run by an attorney, that could be two birds with one stone.  

Capitalizing a Seller financed deal if needed would occur prior to closing once any due diligence stipulations are cleared.  In many settings a Seller does not inject cash into the closing/title company escrow to cash fund a loan.  Depends on what is agreed, might need to if the finance includes some rehab or something the borrower is responsible for in the loan.  In a typical SF deal the property is the capitalization of the loan.  The loan is made in equity.  Variations on that occur as agreed.  

I think that covers the overview.

@Brandon Sturgill  

I made a couple of purchases like this and am planning to lean towards them at least until my cashflow allows me to bank more money. I would suggest a good realestate attorney to get your advice from and show you sample contracts, process, and worst case scenarios.

Agree with Dion DePaoli's comment. It may differ by state but when I've done seller financed deals in California and Arizona, once I'm in contract and ready to execute the deal, the title company handles 100% of the title and note recording/execution. Generally that same title company will also service the note and you will make payments directly to the title company. As the buyer, if there is any existing debt on the property that will remain after close of escrow you will want to be sure that the services and not the seller will be responsible for making those payments going forward. Otherwise you run the risk of a surprise foreclosure if the other liens go unpaid.

All good, after Dodd-Frank, title companies have bailed on doing loan servicing, there is much more to it than clearing payments through an escrow account. As Dion mentioned, find a loan servicer. You certainly don't want to send payments to a seller.

SF notes are installment loans, the are funded by the equity based on the agreed sale price and a deal may involve mixed accounts of equity and cash but that is rare in residential deals. You don't want a seller servicing a loan as a buyer!

You'll be providing a loss payee assignment on insurance, that is appropriate in SF deals just as you would for a bank. Your insurance agent can arrange that and you'll need to take that binder and paid receipt for coverage to settlement, unless other insurance provisions have been agreed to.

See an attorney for standard notes used in your area. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Brandon Sturgill  If you are looking at seller carried deals like I have done you are probably dealing with older, tired landlords... and I'm not trying to stereo type.   

Don't be too aggressive with these owners.  Kicking the potential deal off with a few humble letters about yourself and life plan has been a good entry point for me. 

Frank R 

[email protected] | CA Agent # 01957844