Seller Financing Addendum
Here is a sample copy of the NVAR Standard Form - Seller Financing Addendum
A clean form fillable copy can be downloaded from NVAR.com by clikcin on the Members Only tab and going to the list of downloadable forms. Look for Form Number K1335.
I've received three calls in the last two days from agents with clients considering some form of Seller Financing. The Standard form is a check the box / fill in the blank document that will guide you through most of the important decisions a seller has to make when they are considering offering to take back a note and deed of trust on the property.
What follows comes from the written materials I prepared for a Continuing Legal Education Seminar in 2007:
B. Seller Financing:
Seller financing is likely to become an increasingly popular tool for sophisticated sellers who have built up substantial equity as their homes have appreciated over the last several years. By offering to use some of this equity to help buyers finance their purchase, sellers can set their properties apart from the growing inventory of listings.
The ability to offer Seller financing broadens the pool of potential buyers, which is more important than ever as the inventory of properties in Northern Virginia increases. If a seller cashes out completely when they sell their home, the buyer is limited to their available cash and traditional financing to meet the sales price. But if the seller is willing to provide some (or all) of the mortgage, it may open the property up buyers that may be able to get a traditional mortgage for most of the sales price, but don’t have the resources or don’t wish to liquidate those resources to make up the difference in cash. In such a case, if the seller is willing to hold a mortgage for the difference in the second lien position subordinate to the first mortgage lender, the sale may get completed, enabling the seller to receive the lion’s share of the price in cash at closing.
Seller financing can be as flexible as the imagination of the parties to the transaction. The repayment terms can be negotiated between the buyer and seller in order to make the transaction work. For example, if the buyer needs to sell another property, the mortgage payments might be interest-only for a period of time, or postponed for a certain period or even until maturity. Almost none of the requirements of traditional lenders are involved.
If the seller financing is in the first or only lien, another benefit is that less information may be required of the buyer.
Since the sellers already own the property, they know the property first hand and don’t have to require the usual appraisal process. They only need to be satisfied that the buyer will be able to successfully make the mortgage payments. In those cases the seller would be wise to require a more substantial down payment from the buyer to be assured that the buyer will not walk away from the property if they find themselves unable to make the required payments.
The primary disadvantage of seller financing, especially if the seller provides the whole mortgage, is that the seller only gets a minimum amount of cash at closing – the buyer’s down payment. The majority of the sellers’ equity remains tied up in the property, even though they are now receiving mortgage payments from the buyer. Many sellers need the equity in their home to purchase their replacement home. By financing the mortgage, the seller will have to deal with the headaches of servicing the mortgage, accounting for the receipt of payments, additional payments of principal, concerning themselves with the timely receipt of payments, etc. Although they have the Deed of Trust as security for the property, foreclosure and a trustee’s sale are usually not an attractive option in the event of the buyer’s default.
One final note of caution, in some situations the availability of seller financing may encourage a buyer to overpay for a property. A situation could arise in which a buyer has a certain amount of down payment and a traditional mortgage lender is willing to make a loan, but the combination is still well short of the asking price. The seller might be willing to make up the difference by holding a second mortgage. But unless a property is seriously under-appraised or in need of renovation and improvement, a seller second mortgage could put a buyer in a position where a future sale, after paying off both mortgages, could yield little or no return on the buyer’s investment, and might even cause the buyer to be “upside down.”
Documentation
Contract Provisions/Addenda
The documentation for seller-held financing is not much different in substance than the documentation discussed above for institutional financing. In addition to the note and deed of trust, though, there is typically an addendum to the purchase contract or language inserted in the purchase contract that sets out the basic terms of the parties understanding of the seller financing. At a minimum, the contract should contain agreement as to the amount of seller financing, the interest rate, maturity date, and repayment schedule. The parties should also agree on what lien position the seller financing is to be in, and that it will be the purchaser’s responsibility to disclose the existence of the seller financing to his primary lender. It is also helpful to agree at this point on what happens in the event of Purchaser’s default, whether there will be a different interest after default, and what remedies are available to the Seller Lender.
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A clean form fillable copy can be downloaded from NVAR.com by clikcin on the Members Only tab and going to the list of downloadable forms. Look for Form Number K1335.
I've received three calls in the last two days from agents with clients considering some form of Seller Financing. The Standard form is a check the box / fill in the blank document that will guide you through most of the important decisions a seller has to make when they are considering offering to take back a note and deed of trust on the property.
What follows comes from the written materials I prepared for a Continuing Legal Education Seminar in 2007:
B. Seller Financing:
Seller financing is likely to become an increasingly popular tool for sophisticated sellers who have built up substantial equity as their homes have appreciated over the last several years. By offering to use some of this equity to help buyers finance their purchase, sellers can set their properties apart from the growing inventory of listings.
The ability to offer Seller financing broadens the pool of potential buyers, which is more important than ever as the inventory of properties in Northern Virginia increases. If a seller cashes out completely when they sell their home, the buyer is limited to their available cash and traditional financing to meet the sales price. But if the seller is willing to provide some (or all) of the mortgage, it may open the property up buyers that may be able to get a traditional mortgage for most of the sales price, but don’t have the resources or don’t wish to liquidate those resources to make up the difference in cash. In such a case, if the seller is willing to hold a mortgage for the difference in the second lien position subordinate to the first mortgage lender, the sale may get completed, enabling the seller to receive the lion’s share of the price in cash at closing.
Seller financing can be as flexible as the imagination of the parties to the transaction. The repayment terms can be negotiated between the buyer and seller in order to make the transaction work. For example, if the buyer needs to sell another property, the mortgage payments might be interest-only for a period of time, or postponed for a certain period or even until maturity. Almost none of the requirements of traditional lenders are involved.
If the seller financing is in the first or only lien, another benefit is that less information may be required of the buyer.
Since the sellers already own the property, they know the property first hand and don’t have to require the usual appraisal process. They only need to be satisfied that the buyer will be able to successfully make the mortgage payments. In those cases the seller would be wise to require a more substantial down payment from the buyer to be assured that the buyer will not walk away from the property if they find themselves unable to make the required payments.
The primary disadvantage of seller financing, especially if the seller provides the whole mortgage, is that the seller only gets a minimum amount of cash at closing – the buyer’s down payment. The majority of the sellers’ equity remains tied up in the property, even though they are now receiving mortgage payments from the buyer. Many sellers need the equity in their home to purchase their replacement home. By financing the mortgage, the seller will have to deal with the headaches of servicing the mortgage, accounting for the receipt of payments, additional payments of principal, concerning themselves with the timely receipt of payments, etc. Although they have the Deed of Trust as security for the property, foreclosure and a trustee’s sale are usually not an attractive option in the event of the buyer’s default.
One final note of caution, in some situations the availability of seller financing may encourage a buyer to overpay for a property. A situation could arise in which a buyer has a certain amount of down payment and a traditional mortgage lender is willing to make a loan, but the combination is still well short of the asking price. The seller might be willing to make up the difference by holding a second mortgage. But unless a property is seriously under-appraised or in need of renovation and improvement, a seller second mortgage could put a buyer in a position where a future sale, after paying off both mortgages, could yield little or no return on the buyer’s investment, and might even cause the buyer to be “upside down.”
Documentation
Contract Provisions/Addenda
The documentation for seller-held financing is not much different in substance than the documentation discussed above for institutional financing. In addition to the note and deed of trust, though, there is typically an addendum to the purchase contract or language inserted in the purchase contract that sets out the basic terms of the parties understanding of the seller financing. At a minimum, the contract should contain agreement as to the amount of seller financing, the interest rate, maturity date, and repayment schedule. The parties should also agree on what lien position the seller financing is to be in, and that it will be the purchaser’s responsibility to disclose the existence of the seller financing to his primary lender. It is also helpful to agree at this point on what happens in the event of Purchaser’s default, whether there will be a different interest after default, and what remedies are available to the Seller Lender.
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Disclaimer
posted by Marcus Simon at
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