Creative Financing

I would like to say a few words about creative financing, also referred to  as seller-financing, or a wrap-around deal, or an assumption, or a lease-option deal. I have been putting together such real estate deals for thirty years now.

Creative financing works equally well for residential property, second homes, rental houses, commercial property, building lots, and business opportunities.

Seller-financing is advantageous because it avoids the hassle of making the buyer get a new loan. There are only two parties to a seller-financed deal, buyer and seller, instead of the usual three parties. The lender is not there to rain on the parade. Two is company and three is a crowd – in love and in real estate transactions.

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Are you are a seller having trouble selling your property? You are looking for a “willing and able” buyer. There are a lot of willing buyers but fewer able buyers than before because buyers in general are having a hard time getting financing. So why not eliminate the obstacle? Why not sell on a creative financing basis? Why make the buyer go get a new loan? Let the buyer use your loan.

If you find a buyer on your own, contact me and I will write up the deal. However, you are more likely to find a qualified buyer if you work through a broker. As a seller, you are looking for a buyer who can pay a reasonable down payment – enough to pay for closing costs and commissions and enough to cash out part or all of your equity in the property. Tell your broker that you are open to carrying part of the balance on a contract.

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Are you a frustrated buyer? Do you have a significant down payment but fail to qualify for financing? Look for a seller who will carry the balance.

If you find a willing seller on your own, contact me and I will write up the deal. However, you are more likely to find a willing seller if you work through an agent. Tell your agent to look for a seller who will carry the balance. When your agent finds a willing seller, tell your agent to call me.

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In the old days almost all residential bank loans could be assumed or “wrapped around” or “taken subject to”.  Then in 1986 Congress passed the Garn St. Germain Act. The due-on-sale clause in paragraph 17 or 18 of your deed of trust became enforceable under federal law. Most real estate brokers are afraid to “go around” a due-on-sale clause. Most tell buyers they have to get financing so the seller can pay off his or her loan. However, seller financing can work, although it has to be done carefully and with full disclosure to all parties.

Aside: One way out of our real estate depression would be for enforcement of due-on-sale clauses to be relaxed or suspended entirely. Seventy percent of mortgages are owned by Fannie and Freddie, and they could suspend enforcement of Paragraph 17 or 18 of the standard deed of trust with the stroke of a pen. I have written to the president about this, to the vice-president, the president of Fannie, the president of Freddie, the secretary of the treasury, the head of the FED. Ben Bernanke has written back to say it sounds like a good idea, but he has not done anything to push the idea along.  I’ll keep trying.

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Don’t forget that VA and FHA loans are assumable, provided that the buyer proves credit worthiness.

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If you are a broker working on a deal, don’t be shy about calling. I will discuss the deal with you to determine if I can help you. I love to work with agents. They butter my bread.

There are several ways I can be involved. The buyer or seller can hire me and pay me a fee to draft creative financing documents. Or I can work as co-listing or co-selling broker. You see, I too am a licensed real estate broker. The seller can raise the commission enough to cover my fee, and I can take all or part of my fee at closing – which makes things more convenient for everyone. No one likes to pay attorneys by the hour.

Whether I work as listing or selling broker or as listing co-broker or selling co-broker, I am representing my client both as attorney and real estate broker.

My role is to craft a transaction that will close and which will keep everyone out of  legal hot water. My role is to prepare all documents for the escrow agent and see to it that the transaction gets closed. When there is another attorney involved, it is my role to come to a workable strategy and explain to him or her why I believe a creative financing transaction to be reasonable and safe. I make sure that the other party gets legal counsel if necessary.

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Why should a real estate broker co-broker with me? A broker is  licensed to fill in the blanks in standard form purchase and sale agreements and addendums. When the transaction is complex, the broker should get the buyer or seller to bring in a lawyer who will structure the complex aspects of the transaction.

A broker earns his or her fee by successfully marketing the property and bringing buyer and seller together. A broker does not, in addition, have to write up complex creative financing documents. A broker’s malpractice insurance generally will not cover him for errors he makes when drafting legal documents that only a lawyer should be drafting.

That’s where I come in. I write up creative financing deals. I have lost count of how many deals I have written or reviewed since I started practicing in 1978.

Agents normally write up the deal for no extra charge. Agents are authorized to put together a transaction using standard forms. However, with creative financing, these agreements are not standard. Each deal is different. A lot of issues have to be addressed.

Sincerely,

James Robert Deal
425-771-1110

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