You own real estate in Oklahoma, and you want to sell it. The buyer has approached you asked about the possibility of owner-financing. Would you be interested?
Owner-financing simply means that the Seller agrees to accept a schedule of payments over time from the Buyer. The alternative to seller-financing is conventional financing, which is where the Buyer borrows the money from a third-party, such as a bank.
You like to idea of accepting payments over time, because you get to charge interest, and therefore will receive more money overall than if you were paid in a single transaction. However, you have some serious concerns, the primary one being the question, “who holds title to the property while payments are being made?”
This is a good question, with multiple answers, which we discuss in this article.
What is Seller-financing?
The term seller-financing is sometimes referred to as an “owner-carry” or “owner-financing,” because the owner of the property “carries” the loan or holds the loan while the buyer makes payments. Think of it as the Seller loaning the purchase price amount to the Buyer, and the Buyer making payments over time to the Seller. Seller-financing is an alternative to traditional financing, or conventional financing, where a bank (or third-party) loans the money to the Buyer.
However, in a transaction where the Buyer borrows the money from a bank and brings it to closing, the Seller conveys title to the Buyer. This is because the Seller has been paid in full. But if the Seller is carrying the loan, does the Seller have to convey title? The answer is no.
The Seller can, but does not have to, convey title immediately to the Buyer at closing. There are a couple ways of handling this and I’ll explain both.
The Buyer gets the Deed at Closing after signing the note
A Seller may agree to carry the loan, secured by a mortgage on the property. In this type of arrangement, the Seller will sign a Deed over to the Buyer, and the Buyer will sign a Mortgage over to the Seller. The Buyer walks away with the real estate titled in his name.
In the event of a default, the Seller must file a lawsuit for foreclosure. The lawsuit involves two phases: first, to get a judgment on the amount of money owed, and next, to sell the property to satisfy the amount owed. Any surplus after paying off the debt goes to the Buyer.
The Seller may hold the Deed until the Buyer completes all payments
An alternative way of selling a property is to withhold conveying the deed until the purchase price, plus interest, has been paid in full. This is often referred to as entering into a Contract for Deed. In a contract for deed, the Seller retains title, but the Buyer receives all “equitable” rights to the property, including a right to possess, improve, and use the property.
Some Sellers like this arrangement, because it gives the illusion that the Seller has some greater leverage over the Buyer in the event of default. However, from a legal remedies perspective, there is no advantage. In a case where a Buyer defaults on a Contract for Deed, the Seller cannot just kick the Buyer out with an eviction. Instead, Oklahoma law requires the Seller to file an action for foreclosure, to sell the property to satisfy the debt.
Is it better for the Seller to retain title when owner-financing in Oklahoma?
In Oklahoma, there is not much difference between using a Promissory Note secured by a Mortgage vs. a contract for deed. To the contrary of popular belief, the legal action required in court is basically the same. However, there other benefits to Sellers that retain title when carrying a loan for the Buyer.
One benefit could be that the Seller is able to leverage the property during the term that the Buyer is making payments. As an investor interested in accumulating more properties, this could play an important part in such a strategy.
Another benefit for a Seller could be the ability to conceal the fact that the property has a contingent vested interest. This could allow a Seller to appear to having a larger portfolio, or higher net worth, than may be the reality. Of course, a Seller cannot lie on a loan application without facing intense liability. But a Seller could benefit from appearance, nonetheless.
Now, a Buyer’s perspective will be different from the Seller. A Buyer may be satisfied with paying a higher interest rate to avoid the rigorous underwriting of conventional financing, and therefore be happy to be offered a contract for deed from a Seller. But such a Buyer would benefit from recording the contract for deed with the county clerk. By recording the contract, the public is put on notice of the Buyer’s contingent interest in the property. This would prevent the Seller from taking out other mortgages from traditional banks.
Protect your legal interest by hiring an experienced real estate attorney Oklahoma
When a Seller agrees to carry the loan for the Buyer – and allow the Buyer to make payments over time – the Seller has the option to either convey title at closing, or hold title until receipt of the final payment. The legal process to foreclose is nearly identical but there could be other motivations that would incentives either a Buyer or Seller (or both) to prefer a Contract for Deed arrangement.
Travis C. Smith is an attorney that handles seller-financed transactions. Travis can assist the Buyer or Seller, and hold closings at our downtown OKC office. To schedule a consultation, call 405-607-7799 or send us an email.