Selling or Buying a Home in a Distressed Market: Skip the Shortcuts

Sellers and buyers may investigate alternative methods to buy/sell without bank financing. These arrangements carry significant risks.

Common alternative structures 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. This is 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.

The best solution? Find a buyer who can qualify for their own loan, and pay off the existing mortgage at closing. If you’re thinking about a shortcut, let’s take another look. You can reach Jeff Rattikin at rattikin@rattikinlaw.com.