Considering Seller Financing? Ask These Eight Questions First.

By - Diana Brazeale

In most real estate transactions, the buyer pays the seller cash or obtains a loan to pay the seller in full at closing. Sometimes this is not feasible because of problems with the title or physical condition of the property, or because the buyer cannot qualify for a loan. In this situation, the parties may consider seller financing. Seller financing may take the form of a contract for deed, a rent-to-own contract, a lease with an option to buy, or a mortgage transaction. Whatever the form of the transaction, buyers and sellers both need a well-drafted contract and a clear understanding and agreement as to its terms.

Before any money or documents change hands, the parties need to ask and answer some important questions.

1. Who owns the property? This may seem like a dumb question, but it’s not. Ownership of real estate is not always clear, and properties with unclear ownership or title problems are often offered for sale under seller financing arrangements.

2. What is the state of the title to the property? If the seller is promising to convey clear title to the property at the end of the contract, they need to be able to do it. It is essential to research the property at the recorder’s office or to have a title company to conduct a title search.

3. Is there an existing loan on the property? If so, the contract needs to provide for the loan to be paid off during the life of the contract, and the buyer needs assurance that the regular payments on the loan are being made on time.

4. Do the parties to the contract have good credit and sufficient income to fulfill its terms? The seller needs to know that the buyer is able and likely to make the contract payments. The buyer needs to know that the seller can service any existing debt on the property and that the seller’s other debts are paid so that they do not result in a judgment lien attaching to the property.

5. Are there any tax issues with the property? The parties need to decide who will pay the real estate taxes during the life of the contract, and need to make sure neither party’s income or other tax debts become a lien on the property.

6. Will the property be insured? Insurance protects both the buyer and the seller. The parties need to determine whether the property is insurable, and then decide who will pay the premium and what it will cover.

7. What is the duration of the contract? The seller may want a stream of payments over ten, twenty or more years, or the buyer may intend to obtain a bank loan after two or three years to pay off the seller.

8. What happens if one of the parties defaults on the contract? Nobody goes into a real estate transaction expecting it to fall apart, but it happens. This is the most important part of any seller financing arrangement. A well-drafted contract anticipates problems that may arise, e.g., missed payments or lapsed insurance, and sets out procedures and timelines for the parties to fix problems or terminate the contract. Parties to a poorly-drafted contract will often end up in court and get a result that makes no one happy.

If these questions seem daunting, consider consulting an attorney or other real estate professional to discuss your transaction and determine the right way to structure it to meet your goals.

Diana Brazeale is a real estate attorney and the owner of Brazeale Law Firm, LLC in Branson, Missouri. She has twenty-five years’ experience in the practice of law. She can be reached at (417) 334-7494