[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.
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.