Lease Option Group

An owner contract or also sometimes called owner financing or an owner will carry is a way to buy real estate in which the owner or seller of the property will sell the property to the buyer through a private real estate contract. This eliminates the need for bank financing.
 
An attorney usually prepares the real estate contract for both parties to sign. The seller is selling the home on contract subject to the terms in the real estate contract agreed to by both parties. The buyer would then make payments directly to the seller instead of a bank. Most real estate contracts follow the terms of a traditional loan but can be any agreed upon terms between the parties.
 
Most real estate contracts are recorded on title and the buyer is recorded as a contact owner. The buyer owns the property subject to the terms of the contract. A real estate contract does not have to be recorded for it to be valid. However, it is highly recommended and in the buyer’s best interest to have the contract recorded on title. This serves as notice to the public that the property is being sold on contract and will prevent the seller from obtaining future financing on the property or trying to sell or transfer title to the property without the buyer of record’s permission. It also makes it easier for the buyer to obtain a loan in the future to pay off the contract from a lender because it shows a clear recorded record of when the property was purchases on contract.
 
Most sellers who sell their property on contract usually want a down payment in the range of 10% to 20% of the purchase price and carry the balance on contract. This is the typical expected range but any agreed upon terms can be negotiated. Most sellers also prefer a shorter contract period and want to get paid off reasonably quick. For this reason most real estate contracts have a balloon payment which requires the entire balance to be paid off within a certain date. A real estate contract with a 5 year balloon payment is widely accepted. This means the buyer would make agreed upon payments according to the contract and then the remaining entire balance would be due in 5 years from the date of the contract. Most buyers would then refinance the contract to pay off the balance. Again, any terms can be negotiated between the parties.
 
If the seller has an underlying loan on the property then the real estate contract would be considered or called a wrap around contract subject to the terms of the existing loan. In this case most lenders have a due on sale clause. This means the lender can call the note due if the property is sold and require that the note be paid off. It is highly recommended that any underlying lien holders are notified that the property will be sold on contract and give their written permission of the contract prior to the contract being executed. This will help to eliminate potential hassles and risk associated with lien holders in the future.
 
It is also highly recommended that all contract payments be made through a third party escrow company and the escrow company is instructed to pay any underlying lien holders, annual taxes, and an annual insurance policy for the property. This helps to protect both parties. It assures the buyer that any underlying lien holders are paid and prevents the seller from allowing it to go into foreclosure in the future. The third party escrow company also has a record of all the payments received and will be able to easily calculate any payoff in the future. This makes it easier for the buyer to show his payment record and is an important way for a lender to see the buyer’s established payment history making it much easier to obtain financing in the future from a lender. If taxes and insurance are included in the payments through the third party escrow company it will protect both the buyer and the seller in ensuring that the taxes will be current and an active insurance policy will remain on the property.
 
In regards to any existing liens on the property, it is a good idea to make sure the total balance of all the liens are less then the balance of the contract. This ensures the seller and the buyer that the existing liens will be extinguished either before or whenever the contract is paid in full. It is also recommended that the real estate contract contain provisions stating the buyer and seller agree not to further encumber the property during the contract. This protects both parties.
 
Properly written and with adequate protection for both parties an owner contract is a very good and very effective way to purchase and sell real estate without involving a traditional lender.

Helping America RE/GROW!
Principal Broker,
RE/MAX Metro Gold
Lease Option Group™
www.leaseoptiongrouphomes.com
503-726-4653 (office)
503-209-6183 (cell)
503-726-4654 (fax)