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Seller can help buyer purchase property without financing transaction.
Alternatives to Seller Financing
Seller can help buyer purchase property without financing transaction.
Seller can help with:
¡Buydown
Alternatives to Seller Financing
Seller can help buyer purchase property without financing transaction.
Seller can help with:
¡Buydown
¡Contribution to closing costs
Alternatives to Seller Financing
Seller can help buyer purchase property without financing transaction.
Seller can help with:
¡Buydown
¡Contribution to closing costs
¡Equity exchange
Alternatives to Seller Financing
Seller can help buyer purchase property without financing transaction.
Seller can help with:
¡Buydown
¡Contribution to closing costs
¡Equity exchange
¡Lease/option
Alternatives to Seller Financing
Seller can help buyer purchase property without financing transaction.
Seller can help with:
¡Buydown
¡Contribution to closing costs
¡Equity exchange
¡Lease/option
¡Lease/purchase
Alternatives to Seller Financing
Seller pays to reduce buyer’s interest rate on loan, but doesn’t actually pay lender lump sum at closing.
�Seller proceeds are reduced by amountof buydown.
Buydowns
Alternatives to Seller Financing
Seller sometimes willing to make up shortfall when buyer doesn’t have enough money for closing costs.
Contributions to closing costs
Alternatives to Seller Financing
Seller sometimes willing to make up shortfall when buyer doesn’t have enough money for closing costs.
�Lenders impose limits on how much sellercan contribute.
Contributions to closing costs
Alternatives to Seller Financing
Seller may be willing to accept other assets from buyer and reduce cash sales price.
lBuyer may have equity in vacant land or in personal property such as a boat or recreational vehicle.
Equity exchanges
Alternatives to Seller Financing
Sometimes buyer wants to lease home before actually buying it.
¡Needs more time to get cash for closing or downpayment.
¡Not currently able to qualify for loan.
Lease arrangements
Alternatives to Seller Financing
Seller can lease property to prospective buyer in one of two ways:
¡Lease/option arrangement
¡Lease/purchase arrangement
Lease arrangements
Lease Arrangements
Lease/Option
Lease agreement that includes option to purchase.
Lease Arrangements
Lease/Option
Lease agreement that includes option to purchase.
Lease/Purchase
Purchase contract that allows buyer to lease property for extended period before closing.
Lease Arrangements
In lease/option, seller leases property to buyer for a term and grants buyer option to purchase property at certain price during lease term.
Lease/options
Lease Arrangements
In lease/option, seller leases property to buyer for a term and grants buyer option to purchase property at certain price during lease term.
Seller = Landlord / Optionor
Buyer = Tenant / Optionee
Lease/options
Lease Arrangements
Buyer under no obligation to buy, but seller can’t sell property during option period.
�Often, buyer opts not to purchase.
Lease/option can be used even if seller’s loan has due-on-sale clause.
�Clause not triggered until option is exercised.
Lease/options
Lease/Options
1. Buyer pays seller sum of money (option money) in exchange for option.
� Makes option binding on seller.
How lease/option works
Lease/Options
1. Buyer pays seller sum of money (option money) in exchange for option.
� Makes option binding on seller.
2. Option money not refundable; may be applied to purchase price if buyer exercises option.
How lease/option works
Lease/Options
1. Buyer pays seller sum of money (option money) in exchange for option.
� Makes option binding on seller.
2. Option money not refundable; may be applied to purchase price if buyer exercises option.
3. Rental payments may be applied to purchase (rent credit provision).
How lease/option works
Lease/Options
Rent charged on lease/option is often much higher than rent under ordinary lease.
¡Gives optionee incentive to exercise option quickly.
¡Provides compensation to optionor for uncertainty of outcome.
Rental payments
Lease/Options
Two ways rent credit can be applied to purchase:
1. deducted from sales price; or
2. applied to downpayment.
Rent credit
Lease/Options
Most lenders will accept rent credit as part of downpayment, but not for whole downpayment.
�Buyer must also invest some cash.
Rent credit
Lease/Options
Most lenders will accept rent credit as part of downpayment, but not for whole downpayment.
�Buyer must also invest some cash.
Often, amount in excess of fair market rent can be applied to downpayment:
¡Fair market rent: $1,500
¡Lease/option rent: $1,800
¡$300 out of each rent payment applies to downpayment
Rent credit
Lease/Options
Lease/option document generally includes:
¡all terms of lease, and
¡all terms of potential purchase contract.
Provisions of lease/option agreement
Lease/Options
Agreement should state that option money is not security deposit.
�Seller can require security deposit, but it must be separate from option money.
Provisions of lease/option agreement
Lease/Options
Agreement should state that option money is not security deposit.
�Seller can require security deposit, but it must be separate from option money.
Agreement should also state that if tenant defaults on lease, option rights are forfeited.
�Seller should review tenant’s credit report.
Provisions of lease/option agreement
Lease/Options
Prospective buyer should beware of lease/option if housing prices are likely to go down.
Could be faced with choice between buying property for more than market value or losing:
�option money, and
�rent credit (difference between lease/optionrent and fair market rent).
Declining market
Lease Arrangements
With lease/purchase arrangement:
�Parties sign purchase agreement, notoption, along with lease.
Lease/purchase
Lease Arrangements
With lease/purchase arrangement:
�Parties sign purchase agreement, notoption, along with lease.
�Tenant/buyer provides good faith depositinstead of option money.
Lease/purchase
Lease Arrangements
With lease/purchase arrangement:
�Parties sign purchase agreement, notoption, along with lease.
�Tenant/buyer provides good faith depositinstead of option money.
�Closing date set quite far off; buyer rentsproperty in meantime.
Lease/purchase
Lease Arrangements
If tenant/buyer decides not to buy property, good faith deposit is forfeited.
Lease/purchase
Lease Arrangements
If tenant/buyer decides not to buy property, good faith deposit is forfeited.
lTenant/buyer tends to feel more committed with lease/purchase contract than with lease/option.
lEventual sale more likely.
Lease/purchase
Lease Arrangements
Agreement should have many of the same provisions as lease/option, including rent credit provision.
Lease/purchase
The Agent’s Responsibilities
No matter how well-planned, any seller financing arrangement holds risks.
The Agent’s Responsibilities
No matter how well-planned, any seller financing arrangement holds risks.
Real estate agent should:
�make sure both parties understand sellerfinancing arrangement; and
The Agent’s Responsibilities
No matter how well-planned, any seller financing arrangement holds risks.
Real estate agent should:
�make sure both parties understand sellerfinancing arrangement; and
�encourage both to consult lawyers or CPAs.
The Agent’s Responsibilities
No matter how well-planned, any seller financing arrangement holds risks.
Real estate agent should:
�make sure both parties understand sellerfinancing arrangement; and
�encourage both to consult lawyers or CPAs.
lAgents should never prepare seller financing documents.
The Agent’s Responsibilities
Some states require special disclosure forms to be used when third party (agent) helps arrange seller financing.
Disclosures
The Agent’s Responsibilities
Some states require special disclosure forms to be used when third party (agent) helps arrange seller financing.
Seller financing disclosure statement generally:
¡discloses all financing terms; and
¡ informs seller of buyer’s financial situation.
Disclosures
The Agent’s Responsibilities
Good idea to use disclosure statement even if not required by state law.
�Provides information to parties, and
�Protects agent by documenting that certaininformation was provided to them.
Disclosures
The Agent’s Responsibilities
Disclosure statement does not completely shield agent from liability, however.
Liability
The Agent’s Responsibilities
Disclosure statement does not completely shield agent from liability, however.
lIf transaction turns out badly, agent’s client could claim agent breached fiduciary duties.
Liability
The Agent’s Responsibilities
Disclosure statement does not completely shield agent from liability, however.
lIf transaction turns out badly, agent’s client could claim agent breached fiduciary duties.
lCourt might also hold that agent was inadvertent dual agent, with fiduciary duties to both parties.
Liability
Summary
Alternatives to Seller Financing
ÄBuydownÄEquity exchangeÄContribution to closing costs
ÄLease/optionÄOption moneyÄRent credit
ÄLease/purchase contract
Real Estate Finance Lesson 13 Cumulative Quiz
1. Rather than using an institutional loan, a seller extends credit to a buyer and the buyer gives the seller a deed of trust. This would be known as a/an:
A. assumption B. land contract C. purchase money loan D. wraparound loan
2. Which of the following would NOT be a reason for a seller to use seller financing?
A. It can help attract a buyer at times when interest rates are very high B. It may allow the seller to charge a higher price for the house, in exchange for other benefits C. It provides a large lump sum to a seller who needs to be cashed out D. It provides tax benefits
3. Seller financing can provide significant tax benefits for a seller because it involves:
A. an installment sale B. casualty loss C. depreciation D. recapture
4. A seller second is used to supplement:
A. a land contract B. a new institutional loan C. an assumption D. Either B or C
5. Which of the following is NOT a consideration when structuring the combination of a first mortgage and a seller second?
A. How large a balloon payment the buyer is comfortable with B. How large a combined monthly payment the buyer can afford C. How large a downpayment the buyer can make D. The buyer's credit history
6. A seller might be affected by the IRS's imputed interest rule if:
A. the seller finances too large a portion of the total sales price B. the seller second includes a balloon payment C. the seller second is for too long a loan term D. the seller second uses an interest rate that is too far below market rates
7. To be able to use a seller second in conjunction with an assumption:
A. the buyer must be able to afford the payments on both loans B. the lender's consent is necessary for the seller to be released from liability C. the mortgage may not include a due-on-sale clause (unless the lender agrees) D. All of the above
8. If a seller is willing to finance most of the purchase price but needs some cash at closing, a possible solution is:
A. a land contract B. a wraparound loan C. an institutional loan plus a seller second D. primary seller financing plus an institutional second
9. In a land contract, the seller is also known as the:
A. trustee B. trustor C. vendee D. vendor
10. Who holds legal title during the repayment period of a land contract?
A. trustee B. trustor C. vendee D. vendor
11. The penalty for breach of a land contract is known as:
A. forfeiture B. garnishment C. liquidated damages D. relinquishment
12. Which of the following is an advantage of a land contract for a seller?
A. Court proceedings are usually delayed when there is a breach B. It's difficult to obtain financing that would be secured by a property subject to a land contract C. It's possible that a cloud would remain on the title after a breach D. The seller may be able to reacquire a property in case of default rather than having to sell it and
A. An existing loan wraps around the seller financing B. The buyer assumes an existing loan and receives supplemental financing C. The buyer retains legal title to the property while the underlying institutional lender repays the
purchase price D. The seller financing wraps around the underlying loan
14. A deed of trust used in a wraparound arrangement may be known as a/an:
A. all-inclusive trust deed B. blanket mortgage C. package mortgage D. underlying loan
15. A 'silent wrap' is:
A. a commonly accepted practice B. a failure to notify the underlying lender of the wraparound arrangement C. an arrangement where the buyer assumes the underlying loan D. used when the underlying loan is larger than the planned seller financing
16. A possible advantage of using a wraparound loan is:
A. a below-market interest rate for the buyer B. an above-market yield for the seller C. an above-market yield for the underlying lender D. Both A and B
17. A common way for a seller to assist a buyer is to use a/an ____, in which the seller's proceeds will be reduced by a certain amount at closing, in exchange for a lower interest rate for the buyer.
A. assumption B. buydown C. equity exchange D. lease/option
18. A buyer doesn't have adequate cash to close a proposed transaction, but the seller agrees to accept a sailboat owned by the buyer in exchange for a $20,000 reduction in the purchase price. This is a/an:
A. buydown B. equity exchange C. lease/purchase D. Section 1031 exchange
A. the buyer gives a non-cash asset to the seller in exchange for a reduced sales price B. the buyer leases the property for a period of time and may choose to buy the property at a
specified price during the lease term C. the buyer leases the property but is committed to buying the property at the end of the lease term D. the seller pays discount points on behalf of the buyer
20. A lease/option agreement should contain:
A. all terms of the purchase agreement B. all terms of the lease C. an agreement that the option money is not a security deposit D. All of the above