Seller Financing: Contracts for Real Estate Investors

By Doug Owens


Many investors like deals in which the seller carries back some or all of the purchase price, allowing the investor-buyer to maximize leverage. There are several ways in which seller financing can occur, perhaps the most common of which is the promissory note secured by a deed of trust. From the buyer-borrower's standpoint, this method is favorable but not as favorable as a traditional mortgage which has been all but replaced by the deed of trust. The reason for this is largely that institutional lenders favor the relatively rapid process of foreclosing the deed of trust in case of default without having to file a lawsuit as would be the case with a mortgage. A deed of trust can be foreclosed in approximately one hundred eighty days while foreclosing a mortgage could take a year or more. Sellers who agree to finance their buyers have in many cases fallen into line with the big lenders and used the note and deed of trust as the financing mechanism.

Before 1965, when the deed of trust came into Washington by legislation, real estate contracts were more popular as seller financing tools. The real estate contract is not the same thing as the Real Estate Purchase and Sale Agreement (RESPA) with which investors are familiar. The real estate contract has some of the same elements as the RESPA but its main function is as a means to effectuate a seller financed sale of real estate.

One of the principal differences between a real estate contract and a promissory note and deed of trust as financing mechanisms is that with the real estate contract the title to the property does not pass to the buyer at the closing of the transaction. Instead the buyer receives at closing the "buyer's interest" in the real estate contract. This real estate contract can be recorded just as a deed, followed by a deed of trust can be recorded. Once the amount of the purchase price, plus interest as agreed in the body of the real estate contract has been paid by the buyer to the seller, then the seller must deliver to the buyer a "fulfillment deed," conveying title in recognition that the promise to pay in the real estate contract has been fulfilled. Another important difference between the two financing mechanisms is the seller-lender's remedies in case of default by the buyer-borrower. With the note and deed of trust the seller must send a notice of default to the buyer and record. a notice of trustee's sale. The period between the notice of default and the trustee's sale is usually about one hundred eighty days. The buyer-borrower can cure the default up to the eleventh day before the trustee's sale.


With the real estate contract, the seller-lender's remedy for a default by the buyer is to forfeit the buyer's interest. The real estate contact will usually include some time period within which the buyer can cure a default. There is no statutory minimum for this time. The seller simply records and sends to the buyer a notice of intent to forfeit and if the default is not cured within the time specified the seller records the declaration of forfeiture and the buyer's interest is lost. That includes the value of any improvements the buyer has made while the contract was in force. The buyer can go to court and get the court to order a public sale of the property, and receive any excess of the price over the amount owed, but this can require the buyer to act quickly to begin a lawsuit.

Another difference between the mechanisms is the availability to the buyer of secondary financing. Lenders will usually lend and be secured by a junior lien if there is a first deed of trust and sufficient equity in the property to suppon the amount of the loan and cash flow to make the payments. Some institutional lenders will not lend to someone who has a buyer's interest in a real estate contract, simply as a matter of policy.

So, real estate contracts as seller financing: good if you are the seller, but perhaps something to be wary of if you are the buyer. The preceding is intended to be educational and should not be considered legal advice.

About the author...

Doug Owens practices real estate law and general business law from his office in Seattle. He offers a 20% discount for REAPS members and he can be reached at (360) 299-2990 or [email protected].

REAPS is the oldest – and largest - Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you've never attended one of our meetings, just email our office at [email protected] and be our guest for free!"

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