Orange, CA · Member since 2012 · 66 posts · 17 votes
Hi Everyone,
I'm not an expert on creative financing deals, so I'm reaching out to those who are.
I have a seller who is older, does not want to deal with kicking out his tenant, fixing up and selling his condo. (The perfect scenario for my typical all cash offers, as long as we can agree on price.) He also doesn't need the money immediately. At first I offered my typical low, all cash offer. He wants a little more, and I cant make money off it at the price he wants (since its not my cash, I am using hard money.)
So I asked if he would consider carrying the loan for me and that I might be able to pay more as long as theres no interest. Basically like a partnership. He lets me fix up his condo, list it and sell it, and I get whatever we agree upon now. I think this is called an Option, or is it seller financing with 0 interest?
So how do people make deals like this work? What kind of documents/contracts would I use? Should I even do it? I go to REI club meetings where they talk about seller financing all the time, but I have no clue how to move forward. And how do I protect myself from the seller going out from under me and selling the property after I spent money rehabbing the place??
Thank you to anyone who can help guide me a little!
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Originally posted by @Account Closed:
Hi Everyone,
I'm not an expert on creative financing deals, so I'm reaching out to those who are.
I have a seller who is older, does not want to deal with kicking out his tenant, fixing up and selling his condo. (The perfect scenario for my typical all cash offers, as long as we can agree on price.) He also doesn't need the money immediately. At first I offered my typical low, all cash offer. He wants a little more, and I cant make money off it at the price he wants (since its not my cash, I am using hard money.)
So I asked if he would consider carrying the loan for me and that I might be able to pay more as long as theres no interest. Basically like a partnership. He lets me fix up his condo, list it and sell it, and I get whatever we agree upon now. I think this is called an Option, or is it seller financing with 0 interest?
So how do people make deals like this work? What kind of documents/contracts would I use? Should I even do it? I go to REI club meetings where they talk about seller financing all the time, but I have no clue how to move forward. And how do I protect myself from the seller going out from under me and selling the property after I spent money rehabbing the place??
Thank you to anyone who can help guide me a little!
You buy the property for the agreed upon price. He carries back a promissory note secured by a deed of trust. You use your money or private money to rehab and carry the property (taxes, insurance, HOA, utilities, loan costs). You the list it and resell. When you resell, escrow pays off the loan. It's just like any other rehab deal, except the seller is the lender.
There are a ton of other ways to do it, but IMO this is the cleanest. You own all the equity and any profit you create. But you also have to find the money for the rehab and take all the risk if it doesn't sell.
Ms Poe your absolutely correct... 90% of my deals are escrow instructions only... Mostly unlisted seller carries
I avoided escrow instrux in lieu of a PA for years. Someone on this site pointed out the ease and how made it sense for many of their deals. I called my escrow officer to ask about it and she said she can usually do instrux and get them out to the seller overnight mail the same day. So I sold the next two that way. There isn't anything in the instrux the seller doesn't understand or agree to, otherwise they wouldn't sign it. They get it back to escrow asap, thus saving a bunch of overnight mail costs and time.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
12y
Originally posted by Bill Gulley:
Let me direct you to 12 CFR Part 1204, Section J for the verification and source document to lines 101 and 201. (HUD-1)
I don't see any special circumstances for CA.
Not saying you didn't find an inept closing agent, but how do they know what was agreed to without a contract? How do they know there are no required adjustments required for the HUD or tax requirements.
I tried reading all that legal mumbo jumbo you referenced and I don't see anywhere that states it is required to have a PA to go to escrow and close a RE deal. Can you specifically point it where it does please?
As to the rest, your assumption that I or anyone just found an inept closing agent is absurd and the closing agent knows what is agreed upon by both parties because they are told what to put into the instructions and when both parties sign it, they have this instructed escrow to what has been agreed upon.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Contract is mentioned, once, that's enough. :)
Okay, excuse me, on inept, it's a poor source document and it takes much of the liability of the settlement agent and tosses it right back in the lap of the parties closing. It certainly saves time for the closing office too. I've prepared and accomplished closings so I can see on the other side. There is good reason for a settlement agent to examine the sale contract.
I learn things on BP almost daily too, I've come to the conclusion that Cali is very different and varies from the norm of long standing practice. As I have said many times, RE is local, local custom will govern. I'm not sure how to recognize CA every time a RE comment is made, I suppose saying about 90% of time should do it. :)
We can start another thread on settlements if you like. We might get back to the subject.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
Signed binding escrow instructions without a PA is NOT unique to CA. In fact, I'd be shocked if the signed escrow instructions didn't supersede a purchase agreement unless stated otherwise in the PA in every US state and territory. Yes, I'd bet money that is the case even in MO. I won't scream and yell that it is because I know I don't know everything, but, I'd be surprised if it weren't.
The mark of a reasonable person is their continual understanding they may not know everything and could in fact be wrong at least a few times in their life.
I missed this question in your post above and wanted to address it.
The HUD1 of course, though you referenced we may have been trying to hide something, I know in my case nothing could be further from the truth. In each case, a HUD1 was made and reported to the IRS as it always is in my transactions, you don't need a PA to generate a HUD1.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Will, didn't mean people were hiding anything, meant it as a settlement agent thinking if anything could be missing.
The HUD-1 isn't a "source document" a contract is for filling out the HUD. Point being, a buyer and seller could have contracted for something different, like personal property being included and they agreed to call it good.
It's the closing agents responsibility to close transaction as they were contracted. A buyer and seller could declare anything on closing instructions, it's an audit thing. Doing that let's the settlement agent off the hook in determining what the transaction includes or if they are properly accounting for amounts listed on the HUD and on filings.
Closing agents are subject to audits, in Cali, if that's what the state allows then, like I said, so be it, but it's still a poor auditing method. That's my point, probably why contracts are usually required. :)
It is the closing agent's duty to follow the signed escrow instructions to the letter unless there is a conflict with law. The escrow agent is not a party to the PA.
In some states, the PA will include the escrow instructions in it but, it does not have to do so. It just eliminates a second set of signatures needed to open escrow.
I think Bill's confusion comes from being familiar with a combined PA containing the escrow instructions or his forgetting that the escrow instructions are just a contract telling the escrow agent exactly how to transfer title and under what conditions.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
No, I'm pretty sure I've written more closing instructions than anyone in this thread, actually closed more and I fully understand the requirements, it's not me that doesn't understand, obviously folks here don't know what "source documents" are. I made it pretty clear that it's an option in CA and the effects, yet some can't or aren't follow(ing) what was said as to audits, probably because no one here has ever done an examination audit. Have a great day. :)
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
12y
This is your statement Bill that you made regarding the "hiding" of details of a transaction. I don't believe I misread it as it is clear what you aid. This is why I stated that in no way was I personally trying to hide anything from the transaction and the escrow would have no reason to do so either. You toss out several terms that I am either less familiar with or not familiar with at all, "source document" included. You know more about these names and the legal aspects than I do, I would never claim to have more knowledge than you on that topic. So I assumed that the "source document" you were referencing was what document I would use to report for audits, taxes, etc. I can care or less what escrow agents must use for their audits as that does not involve r affect me.
I may be confused on some of your terminologies, however, as far as going to escrow without a PA, that is not so uncommon as you portray it, at least in the states I have done biz and that includes states other than CA.
In an effort to be more versed in proper terminologies (we had this discussion in another thread and I agree 100% that tibia beneficial for all to know and use the proper terms), perhaps you can help me and all others by defining some of the terms you use such as "source document" which could mean anything.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Source documents are underlying documents that show the origination of a transaction, your gas pump receipt is a source document in showing you fuel expenses, a shipping invoice will show when an item was shipped and perhaps received, a parking ticket could show that at a certain time your vehicle was at some location, they are documents that can justify a claim being made.
The closing agent can clearly show that there were no contractual obligations or other agreements made that would be applicable to that transaction.
It depends on your settlement instructions, is there some disclosure or declaration made that no other property other than real property is involved, anything as to no other credits, allowances or other financial arrangements have been made or are expected to be after settlement? Did you contract require the buyer to pay for any insect destroying inspection, if so, where's the receipt, was it done, were the terms of the contract accomplished? The only way to know is to read the contract.
What they have done is to eliminate the responsibility of the settlement agent to ensure the terms and agreements contracted have been met, they can't be responsible for something they have no knowledge of.
Your title insurance is an insured closing, meaning the title insurance covers errors and omissions in the closing and settlement according to the contract as agreed, if they don't get the contract they can't ensure terms were met and they won't insure any error in missing something not disclosed.
IMO, your settlement agent and title insurance company are avoiding risks by simply accepting instructions and basically performing only an accounting and administrative function of filing and document collection along with tax filings. Half of the duty of a settlement agent isn't being accomplished. The due diligence of seeing if there are any surrounding issues of the transaction exist or if compliance is met.
Now, again, if that's what they do in Cali, more power to them and the related parties, if they aren't concerned with a buyer and seller or either one skating by with something undisclosed, under any circumstance, then so be it.
I can say I wouldn't fund any loan in a closing that was not fully insured where the settlement agent determines that all contractual obligations were met, documents properly executed and filed. All of my loans and settlements required the closing per contract terms including all attachments and addendums or any other agreement between the buyer and seller made prior to settlement. That would include an agreement to buy a 4 year old push lawn mower for $4,000 from the buyer after closing. Granted, kickbacks may not be disclosed, but if they were required to be shown at least I'd have recourse if it were discovered.
...
Your title insurance is an insured closing, meaning the title insurance covers errors and omissions in the closing and settlement according to the contract as agreed, if they don't get the contract they can't ensure terms were met and they won't insure any error in missing something not disclosed.
Title insurance only insures you have marketable title and that the document conveying title accurately lists all exceptions to that marketable title.
Title insurance does not insure the closing, at all, in any way.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
12y
Look up "insured closing agent" or "insured settlement/closing" real lenders required it and it is included. Maybe not in Cali, who knows what goes on out there .........
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
This thread is bizarrely off rail. Those with in-the-field application and everyday use of escrow instrux, in CA and elsewhere. Versus someone with experience in the institutional world. My current escrow offer and her team specialize in commercial and investor escrows. Perhaps she has prepared and read more escrow docs than Bill Gulley? Perhaps she has specific training and information relevant to acting lawfully and/or within company policy? Perhaps.
Since state law here (and elsewhere in the West actually) states that signed escrow instrux SUPERCEDE a signed purchase agreement, it's not that hard to grasp why Chicago and Fidelity and First American where I am have no issue with starting with the instructions.
I work some really convoluted title messes and I can assure I get no special love from title and escrow. Just the opposite. Many of my deals have red flags and are put through hoops that others are not. Title companies I work with take virtually no risk, IMO. They just say no to anything and everything that they don't understand or that their legal dept. tells them to avoid. I seriously doubt the use of EI without a purchase agreement is a risk to them.
It will cover errors in the transfer of the title caused by the closing agent. For example, if the closing agent fails to properly record the deed.
It will not cover performance of the sales contract. If the closing agent fails to transfer the title to the farm machinery you and the seller agreed to exchange when you bought their farm, or any personal property for that matter, the title insurance will not apply. The E&O will.
Will, didn't mean people were hiding anything, meant it as a settlement agent thinking if anything could be missing.
The HUD-1 isn't a "source document" a contract is for filling out the HUD. Point being, a buyer and seller could have contracted for something different, like personal property being included and they agreed to call it good.
It's the closing agents responsibility to close transaction as they were contracted. A buyer and seller could declare anything on closing instructions, it's an audit thing. Doing that let's the settlement agent off the hook in determining what the transaction includes or if they are properly accounting for amounts listed on the HUD and on filings.
Closing agents are subject to audits, in Cali, if that's what the state allows then, like I said, so be it, but it's still a poor auditing method. That's my point, probably why contracts are usually required. :)
This makes no sense to me. A purchase agreement, if used, could have just as many side arrangements as the escrow instructions. EI or PA, buyers and sellers could be settling stuff outside of escrow without leaving the proper paper and audit trail.
As mentioned earlier, since EIs supersede a PA here, it's what's outlined in the EIs, including all amendments and changes, that informs the escrow agent. The original PA is not referenced after the first set of signed EIs. Unless there is an RE agent or lender involved that is served by an original PA.
Maybe that's Bill's confusion? FSBO deals and deals without conventional lenders have no parties that require a PA.
Look up "insured closing agent" or "insured settlement/closing" real lenders required it and it is included. Maybe not in Cali, who knows what goes on out there .........
Maybe you could explain how escrow error is related to title insurance? Title and escrow don't have to be performed by the same companies. I can use an escrow company and order title from a totally different title company. Title insurance from Chicago isn't going to help with errors made by Greene Escrow.
In the past, I've been subject to some mondo errors and omissions by Escrow, but title insurance could not make me whole. Title insurance insured their title work and the title chain, not the $10K math error or failure to pay off liens in a timely manner. My only remedy if they didn't agree to correct the errors would have been to sue. Title insurance was not coming to rescue me from escrow error.
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Originally posted by @Account Closed:
[REMOVED]
Well, the OP is in CA and I suggested that if she has a live seller finance deal that she go directly to escrow instructions. Lots of variables there that may make it all moot, including whether or not the OP's seller will really sell. Deal hounds like myself like to see people get stuff under contract and/or into escrow ASAP. Especially in So Cal where other investors are lurking around every corner, including on BP. :)
Orange, CA · Member since 2012 · 66 posts · 17 votes
12y
@K. Marie Poe
Its still in the works! But I think I want to wholesale it instead. (For other reasons, the tenant situation is dicey and I might not want to sign up for it) But I actually saved this conversation for future deals. I really want to do some seller finance deals this year but had no clue how to do it. I loved your straight forward simple steps. Big thanks!!
Great thread guys! Thank you for the help and advice!
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y
OK, could we PLEASE set aside these discussions of the mechanics of escrow and what title insurance means and focus on helping @Account Closed with her deal?
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
12y
Originally posted by @Account Closed:
@K. Marie Poe
Its still in the works! But I think I want to wholesale it instead. (For other reasons, the tenant situation is dicey and I might not want to sign up for it) But I actually saved this conversation for future deals. I really want to do some seller finance deals this year but had no clue how to do it.
As stated before and in email, if you want to wholesale this or need help negotiating with seller financing, let me know, I could be your buyer if the deal makes sense.
Orange, CA · Member since 2012 · 66 posts · 17 votes
12y
@Will Barnard Thanks Will. I'll let you know if I get any other seller finance opportunities. I have a group already on this deal for wholesale, but maybe next time. Thanks for reaching out and appreciate your help!