Author Archive
CONTRACT FOR DEED – ADVANTAGES AND DISADVANTAGES
May 15th, 2009 categories: Buyer Strategies, Mortgage & Finance, Seller Strategies
[PLEASE NOTE: Attorney John Pitrelli continues his series on what home buyers and sellers should know about practical legal matters in the current real estate environment.]
This is a follow-up to my previous posts which dealt with common myths about the Contract for Deed method of owner financing. In this post I will discuss the advantages and disadvantages of the Contract for Deed.
The Contract for Deed will allow the sale of property when traditional forms of financing are not available to the Purchaser.
Unlike lease options or lease purchasers the sale is final when the Contract for Deed settlement documents are signed. This
can be extremely important for the parties who may wish to trigger time frames for capital gain rollover or exemptions.
With Contract for Deed financing closing costs are significantly less, since there is no Deed of Trust to record, no points to pay or other lender fees. The Seller may be able to take advantage of a low interest loan they have secured by the property by wrapping that loan at a higher rate.
Perhaps, the greatest advantage is the Purchaser receives the tax benefits (deductions) of home ownership, thereby making a slightly higher payment affordable when comparing ownership under a Contract for Deed to renting.
As to disadvantages, the Seller remains liable on the underlying debt which may impact the Seller’s ability to procure new financing on a future purchase. There is also a remote possibility that the underlying lender my consider the Contract for Deed as an event that triggers the due on sale clause and they elect to accelerate the loan.
A disadvantage for the Purchaser is the cost of a subsequent refinance of the property.
I have had considerable experience with Contract for Deed financing over the past 30 years and it has proven to be very successful for the majority of my clients. I do believe however that a Contract for Deed should be used sparingly and should be reserved for special situations. The parties to the transaction must be comfortable with the ability of the Purchasers to perform and the credibility and trust worthiness of the Seller. Above all, the parties should be fully advised about the risks of the transaction and should seek legal counsel as Contracts for Deed do involve risks to both the Purchaser and Seller.
[John welcome questions or comments. You can contact him at j.pitrelli@keytitleva.com]
| Discussion: No Comments »
CONTRACT FOR DEED – COMMON MYTHS ABOUT THIS FORM OF OWNER FINANCING
April 24th, 2009 categories: Buyer Strategies, Mortgage & Finance, Seller Strategies
[PLEASE NOTE: Attorney John Pitrelli continues his series on what home buyers and sellers should know about practical legal matters in the current real estate environment.]
This is a follow up to my previous post about Owner Financing. The Contract for Deed has been frequently misunderstood and often maligned. The purpose of this post is to dispel some common myths about the Contract for Deed.
The following are false statements:
- A Contract for Deed is illegal.
- Contracts for Deed violate the due on sale clause in all Deeds of Trust and will result in a foreclosure of the loan.
- A Contract for Deed is not a final sale of the property.
- Real Estate commissions will not be paid until the Deed is actually recorded in the future.
- An Owner/Purchaser under a Contract for Deed has no greater rights with respect to the property than a general creditor of the Seller.
- A Contract for Deed should not be recorded in the land records.
- Selling or Buying under a Contact for Deed is no better then renting.
- The IRS will not recognize a Contract for Deed as a sale or allow the Purchaser to deduct interest and tax expense for home ownership.
- There must be an underlying loan to sell by Contract for Deed.
In my next post I will explore the advantages and disadvantages of the Contract for Deed.
| Discussion: No Comments »
OWNER FINANCING IN REAL ESTATE SETTLEMENTS
April 7th, 2009 categories: Buyer Strategies, Mortgage & Finance, Seller Strategies
[PLEASE NOTE: Attorney John Pitrelli continues his series on what home buyers and sellers should know about practical legal matters in the current real estate environment.]
Recently, I have seen a renaissance in the use of owner financing in real estate settlements. This is not surprising, since owner financing can be a powerful tool for buying and selling property, especially when bank financing is difficult to obtain.
One of the most frequently used methods of owner financing is the Contract for Deed or Installment Land Contract. With this method of financing the Deed to the property is held in escrow and not recorded until the Seller (Owner) held financing is paid in full. The buyer will enjoy all the benefits of home ownership recognized by IRS, even though the Deed to the property has not been recorded.
In my next post I will explore common myths about Contract for Deed and the advantages and disadvantages of that method of owner financing.
Another method of owner financing is the Seller held Deed of Trust. With this method of financing the title to the property will immediately pass to the Buyer. A security instrument (Deed of Trust) will be recorded in conjunction with the Deed to the property affording the Seller a foreclosure remedy in the event the buyer defaults on the loan. A carefully drafted Deed of Trust will provide maximum protection for the Seller and still meet the requirements of the Virginia code.
In situations where owner financing is feasible there is extreme flexibility in how a deal can be structured. The settlement costs are substantially less since there are no lender fees. The need for formal appraisal is eliminated. I still urge Sellers to exercise prudent underwriting of their loan, by checking credit and employment, but tempered with common sense if credit issues can be explained. To this end the help of an experienced real estate professional is invaluable.
There are many buyers out there that cannot currently qualify for traditional bank financing. They may be victims of the housing bubble burst, yet they need a place to live and are otherwise viable buyers. Owner financing may be the answer for these potential buyers and for Sellers who are willing to take a risk to sell their property.
| Discussion: No Comments »
BUYING BANK-OWNED PROPERTIES – WHAT YOU MUST KNOW
January 15th, 2009 categories: Buyer Strategies
[PLEASE NOTE: In this post, Real Estate Attorney John Pitrelli continues his series to help homebuyers avoid the hazards that can arise when the Seller is a bank or lending institution. To view John's other posts please click here.]
In my last two posts I covered title concerns and risk imposed by Bank-counter addendums. In this post, I will address home inspection issues and legal exit strategy for a buyer when the deal is no longer desirable. Read the rest of this entry »
| Discussion: No Comments »
BUYING BANK OWNED PROPERTIES (BUYER BEWARE)
November 14th, 2008 categories: Buyer Strategies, Mortgage & Finance
[PLEASE NOTE: In this post, real estate Attorney John Pitrelli kicks off a series to help homebuyers avoid the hazards that can arise when the Seller is a bank or lending institution. To view John's other posts please click here.]
When you are dealing with the bank
Currently a substantial number of our settlement transactions involve Banks Read the rest of this entry »
| Discussion: No Comments »
THE POST-CLOSING PROCESS: SHOW ME THE MONEY
August 18th, 2008 categories: Buyer Strategies, Mortgage & Finance, Seller Strategies
[NOTE: John Pitrelli continues his series for home buyers and home sellers in Northern Virginia with this brief explanation to help "demystify" the process of settlement and "closing" on your home purchase or sale. To view John's other posts please click here.]
Once the closing documents have been signed and notarized, the post-closing process can begin. The first step in post-closing is to verify that all funds have been received in “liquid” form (cash, wire or certified funds). Read the rest of this entry »
| Discussion: No Comments »
THE PRE-CLOSING PROCESS – KNOWING THE BASICS BEFORE YOU GET TO THE TABLE
July 27th, 2008 categories: Buyer Strategies, Mortgage & Finance, Seller Strategies
[NOTE: Drawing on several decades of experience as a real estate attorney, John Pitrelli contributes articles of interest for home buyers and home sellers. To view John's other posts please click here.]
As a home buyer, one of the most important parts of the transaction is the closing. What are some of the pitfalls of the closing process and how can you avoid them? In my next few posts I hope to describe what should happen and what you can do to avoid problems. Read the rest of this entry »
| Discussion: No Comments »
THE TAX DEFERRED EXCHANGE – AN INVESTOR’S SAVING GRACE
July 3rd, 2008 categories: 1031 Exchange, Buyer Strategies, Seller Strategies
[NOTE: Drawing on several decades of experience as a real estate attorney, John Pitrelli contributes articles of interest for home buyers and home sellers. To view John's other posts please click here.]
A 1031 or tax deferred exchange is a method by which a property owner trades one investment property for another property, without having to pay any federal income taxes as a result of the transaction.
To take advantage of 1031 you must own the property for investment or business purposes. Typically residential rental property or commercial property will meet this requirement. The property does not have to be improved (raw land can qualify). However, certain individuals or companies will not qualify if they are considered by IRS to be “dealers”. For example, if you are a builder and own the property strictly for resale, such as a builder’s inventory of new homes, you will be considered a dealer. Also, if you buy property with the intention of reselling it quickly (”flipping” the property) you may likewise be treated as a dealer and ineligible for a 1031 tax deferred exchange. If you own your property as a second home or use it personally for more than two weeks per year, you will be unable to utilize a 1031 exchange for that property. Read the rest of this entry »
| Discussion: No Comments »
