From Note Seller by Fred and Tracy Z. Rewey
When people go to sell their home, the majority will still owe money on
a loan from when they bought the property. Since few sellers own a
property free and clear, what to do with this underlying lien is an
important consideration with owner financing.
A title report from a reputable title company will identify any debts
against the property still owed by the seller or any prior owners. In a
traditional transaction, the seller’s liens against the property are
paid off at closing from either the cash funds deposited by the buyer
or the funds advanced by the lender for the buyer’s new loan.
With a seller-financed transaction it is unlikely the buyer will
deposit sufficient down payment funds at closing to pay off the
underlying liens from the seller’s proceeds. If the seller’s liens are
to remain after closing, also known as a wraparound, there are several
important considerations.
First, most loan documents contain some type of “due
on sale clause.”
A due on sale clause states that if the property
ownership is transferred the lender can call the outstanding balance
plus any accrued interest due and demand immediate payment in full.
There are many creative strategies that have been employed to avoid
triggering a lender’s due on sale clause. The use of unrecorded real
estate contracts, purchase by a trust entity, and use of third-party
administrator are just a few.
While there are no guarantees, from a practical approach, lenders
seldom exercise their due on sale clause provided the payments are
received timely and other note terms, such as current taxes and
insurance, are in compliance.
Nonetheless, the lender has the right and
this has the potential to cause subsequent problems. A competent
attorney or title agency can provide wrap around disclosure language
for the documents, making all parties aware of the situation.
Second, it is imperative to make arrangements for
timely payment of the seller’s underlying lien from the purchaser’s
monthly payment. It is a trusting fool that sends their payment each
month directly to the seller and hopes the seller promptly sends on
their portion to the lender. What if the seller forgets, or worse, gets
in a financial bind and uses the money that month for other expenses?
When using seller financing with a wraparound situation, it is
advisable to use the services of a third-party escrow or servicing
agent. The third party will receive the monthly payment on the note
from the new purchaser, apply to principal and interest, and then
disburse the appropriate payment to the underlying lien holder, with
any difference or overage remitted to the seller.
For more great information go to www.NoteSellerBlog.com by Fred and Tracy Z. Rewey
For more helpful ideas on seller financing with underlying liens please
visit the bookstore for Personal Profit Series: Notes – Your Complete
Money Making System to Buying, Referring, Creating and Holding Real
Estate Notes!
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