Buying or Selling a Home in a Distressed Market: Shortcuts Can Only Lead to More Trouble

The difficulties are due to high interest rates, lingering inflation, low supply and tighter lending standards. As a result, sellers and buyers are often investigating alternative methods to buy and sell homes without bank financing. While this may seem like a practical solution for both parties, these informal arrangements carry significant legal and financial risks.

Common structures used in these situations include contracts for deed, lease purchase agreements, and seller-financed transfers. Under contracts for deed and lease purchase arrangements, no legal ownership transfers until the purchase price is paid in full. This leaves the buyer vulnerable to unscrupulous sellers who may default on existing mortgages, sellers who die prior to conveying legal title, and potential liens filed against the property. Such arrangements are also subject to strict state regulations, may potentially violate “due on sale” provisions of existing mortgages, and in some cases be legally void on their face. Added complications related to existing tax and insurance accounts often result in the parties navigating far more issues than they initially considered.

A slightly safer but still risky alternative involves the seller transferring ownership to the buyer immediately, with the buyer signing a note and deed of trust back to the seller. Often called a “seller-financed” transaction, or a “wraparound mortgage”, this structure gives the buyer immediate legal ownership of the property, but it doesn’t eliminate the danger of foreclosure if the original seller fails to timely pay their existing loan, and may still violate the “due on sale” provisions of that mortgage.

The best solution? Find a buyer who can qualify for their own loan and pay off the existing mortgage at closing. Short of that, sellers and buyers in difficult present situations should be extremely cautious in entering into any of the above real estate structures. If you’re thinking about a shortcut, contact Jeff Rattikin and let’s take another look. You can reach him at rattikin@rattikinlaw.com.