HOW TO ASSUME THE NON-ASSUMABLE LOAN - CONTRACTS FOR DEED

By Craig E. Buck and Teri L. Anderson Buck, Attorneys at Law

Copyright 2007, Craig E. Buck and Teri Anderson Buck
All Rights Reserved. No part of this material may be reproduced, transmitted or stored in any manner, in any form or by any means without the express written permission of the author. Permission is granted to reproduce and distribute this text in its entirety and if electronically with a link to our Website at URL www.VirginiaClosings.com

ABOUT THE AUTHORS: Craig E. Buck and Teri Anderson Buck are partners in the law firm of Buck, Anderson & Somerville, P.C., specializing in real estate, and real estate closings with offices at:
6088D Franconia Rd. Alexandria, Va. 22554 (703) 921-0809
1109 Heatherstone Dr. Fredericksburg, Va. 22407 (540) 785-2122

E-Mail: ReaLawBuck@AOL.com

Craig E. Buck was 1993 and 1994 Chairman of the Northern Virginia Association of Realtors Standard Forms Committee and is author of The Real Estate Contracts Handbook. He received the 1993, Northern Virginia Association of Realtors Affiliate of the Year Award.  Teri L. Anderson received the 1994, Affiliate of the Year Award from the Prince William Association of Realtors

WARNING - We have prepared this material based on forms and procedures followed in our offices.  Other settlement service providers may use different forms or procedures and we can not vouch for them.  This information is very specific to settlement practices and laws in Virginia.  Other areas may have different laws or practices that produce different results.  This article is intended to give general information, not specific legal advice.  Any legal services mentioned in this article would be performed by the law firm of Buck, Anderson & Somerville, PC and not Alliance Title & Escrow, Inc.

Credit is tight and demand is down.  Lenders are going out of business or imposing stringent new requirements.  The result is a lot of disappointed buyers and sellers.  Its time to dust off some tricks from the past and learn how to move property by taking over existing loans!  Here are some answers to the problems we face in today’s market:

PROBLEM:  The seller is up-side-down.  Lower prices mean homes might not appraise for enough to pay off the seller’s old loan and costs of sale. ANSWER:  Use a Contract for Deed to sell without a new appraisal.

PROBLEM: High inventory means sellers must do something to make their house stand out from the crowd.  Cutting the price is not an option. 
ANSWER:  Use a Contract for Deed to offer seller financing and attract a wider range of buyers.  Favorable financing also adds value to the transaction and can raise the sale price.

PROBLEM:  The few lenders who remain in business have tightened qualifications, increased down payments and restricted Jumbo loans.  ANSWER: Don’t get a new loan.  Use the old loan with a Contract for Deed.  Forget financing contingencies. 

PROBLEM:  The seller doesn’t want a short-sale or foreclosure to destroy his good credit. 
Answer:  Use a Contract for Deed and let the buyer keep the loan current.

 
WHAT IS A CONTRACT FOR DEED? 

The Contract for Deed is a secure method of private financing whereby the buyer takes over the seller’s payments.  The seller retains title to the property until the buyer pays off the loan – usually by a refinance or sale in a few years.  The buyer gets possession and the benefits of ownership, including future appreciation and income tax deductions for interest and property taxes. 

 SIX ADVANTAGES OF THE CONTRACT FOR DEED

  1. The existing loan stays in place.  No financing contingency, no new qualifying, no appraisal, no worrying about whether the lender will deliver on a new loan.
  2. Qualifying is as easy as the seller wants it to be.  Forget restrictive loan programs and inaccurate credit scoring.  Attract a wide range of buyers.
  3. Costs are less because there are no lender points or processing fees. Junk fees have no place here!  Sellers avoid pre-payment penalties.
  4. Buyers will pay more.  No lender hassles.  No appraisal.  Quick settlement.
  5.  Sellers can profit from the financing.  Make up for lower prices with” wrap around” financing. 
  6. Financing can be flexible.  Match the payment terms to the parties’ needs.

 CONTRACT FOR DEED PRECAUTIONS  

Most existing loans contain a due-on-sale clause and there is a possibility the lender may discover the transaction and force a refinance.  We can’t give a guarantee, but our experience is that lender’s do not seem to notice or care -- so long as the buyer keeps the payments current.  The buyer has a strong incentive to keep payments current or he will lose his investment.  There is little financial advantage for the lender to call the loan because interest rates have remained low and lenders don’t need another foreclosure on their books.  Contracts for Deed are not against the law, they only give the lender the option to call the loan.

The seller takes risks similar to a landlord’s but the Contract for Deed has many advantages over a lease.  The buyer has made a down payment and paid closing costs so he has an investment to protect.  Also, the buyer usually pays the full cost of the mortgage, homeowner fees and maintenance so there is no negative cash flow. 

If you want to use Contract for Deed financing, get qualified professionals to advise and protect you.  Alliance Title and the law firm of Buck, Anderson & Somerville have handled hundreds of Contract for Deed transactions and can assist with yours.  We have over 30 years experience and “wrote the book” on Contracts for Deed.

HOW DO YOU DO IT? 

Prepare a Sales Contract using the MRIS Seller Financing Addendum to set out the terms.   In paragraph A, “Type of Financing,” cross out  First  Second  Third Deed of Trust and substitute “Wrap Around Contract for Deed.”  Cross out subject to the approval of the prior lender(s) if applicable.  Then, fill in the payment terms required by paragraph B. “Loan Terms”.  If the loan is adjustable, be sure to spell out the terms.  Check block C1, “Escrow Required” to escrow for taxes and insurance.

If needed, add a contingency:  “This Contract is contingent upon the parties receiving an explanation of Contract for Deed financing from an attorney of their choice.  This contingency expires 6PM on (date) and the Contract will be in full force and effect if not cancelled by written notice.” 

We satisfy this contingency by offering free telephone consultations for your clients and are ready to help with your transaction.  We will also prepare a Contract for Deed Addendum to explain the transaction and release you from any liability to either the buyer or seller.

Please call with any questions or to arrange a short presentation to the agents in your office. 


THIS IS A SAMPLE FORM - IT MAY NOT BE APPROPRIATE IN ALL STATES AND FOR ALL SITUATIONS.  CHECK WITH A LOCAL REAL ESTATE ATTORNEY BEFORE USING THIS FORM!  THIS FORM IS COPYRIGHTED AND ONLY AUTHORIZED FOR USE WITH SETTLEMENTS AT ALLIANCE TITLE & ESCROW.