Key Takeaways:
- A Listing Agent should always get paid when helping a buyer with a subject to or seller finance transaction
- Realtors can help sellers decide if seller finance is a good option by explaining the benefits related to their situation and informing the seller’s of the risk of default and how this works in Texas
- Seller’s who want too much for their house or are needing to move shortly after buying their property may not make money on a traditional sale however on a sub 2 sale they may walk away with cash in hand.
I am a realtor and like you I was also skeptical of subject to offers or wrap around mortgages until one day I sold my own house subject to my existing loan that still remains in my name today. That’s right, you heard me! My first subject to deal I was the seller, I no longer own the home but the new owner is still making payments on my loan and the loan is still in my name. Fast forward a few years and we now buy homes like this. There are a number of benefits to seller financing or sub 2 deals to both the buyer and the seller. If you are a realtor and have a listing that is sitting and not moving/ not getting offers you may want to consider this as an option to help your client. We will cover the top concerns for realtors, top concerns for sellers and why/ when should a seller consider selling like this. Let’s dive in!
Top Concerns For Realtors
Let’s cover first things first! You should get paid!
- Commission: Do I still get paid Commission for my listing and all of the hard work I did? YES!!! You absolutely should get paid. Make sure your buyer is brining some cash to the deal to cover your commission and hopefully there is enough in the deal to put some immediate cash in your seller’s hands too!
- Is it Legal? YES! It is legal in Texas! TREC has a promulgated form for seller financing and they also cover these types of deals in Continued Education courses. You’ll also find almost every type of loan has documentation on how these can be structured.
- Timeline: Is a seller finance transaction long? Seller finance transactions can actually be really fast. Lenders are typically the main thing that makes an ordinary transaction 20+ days. If we have all of the paperwork and negotiation out of the way we usually just need enough time to verify a survey so a deal can be done in a week or two.
- Title Company/ Law Firm: Make sure that you are using a title company or law firm to do this transaction that knows and understands how these deals need to be done. Working with an inexperienced firm on this one may cause you more head aches than worth the while.
Top Concerns for Sellers
As a realtor you are also responsible to look out for your client and ensure that they understand the deal they are getting into. We like having a few additional disclosures in our offers to help clarify in black and white that they understand what seller finance means or subject to existing loan means for them. Our attorney has helped us create some documents that change legal talk into plain english so they understand what the terms of the agreement are. Here are the top concerns from Sellers we face and how we help them understand what they would do if they face these situations:
- Default: What if the buyer stops making payments or defaults on their payments? In Texas, you should look to set up the Deed Of Trust. This is in the TREC Seller Financing Adendum. This will enable the note holder (AKA the seller) to file a foreclosure on the property. The good news is that in Texas we are a non-judicial state which means that it’s as simple as filing the paperwork and a foreclosure can be done in as little as 42 days or up to 60 days. It is important that the seller vet the buyer and understand how they plan on making the payments. It is also important that the deal makes sense for the buyer. If the buyer were to rent out the property would the rent cover the principal, interest, taxes, insurance and still have a few hundred dollars to cover expenses? If the buyer shows you clearly how they will make money in this deal it can save you a lot of head ache down the road. It’s better to have a win-win deal here instead of take the risk of default down the road.
- Due On Sale Clause: Most loans have a due on sale clause that basically says that if the deed of the property is transferred then the lender has the option to call the loan due on sale. In that scenario all of the remaining balance would be accelerated and the bank will be asked to be paid in about 35 days. Keep in mind that if the bank is receiving payments this is a very rare clause for them to call as most banks try to avoid foreclosure at all costs. If it does happen it is important that your buyer explain to you how they plan on remediating the situation. Here are several things we would present:
- Talk to the lender. The lender may see the new buyer is in better standing and may allow a loan assumption or give another way to keep possession and keep the loan in place. Keep in mind the bank does not want a foreclosure. Foreclosures are expensive and they are incentivized to work with you.
- Refinance: The buyer can use different types of loans to refinance their position out of the loan you have. Common loans that can perform quick are hard money loans or personal loans.
- Sell The property: Depending on the equity in place the buyer may be able to sell the property and pay off the loan in time.
- Deed Transfer or Lease Back Options: In some states there are options to deed the property back to the original owner with a way to return the property to the future buyer at a future date. It is important to talk to a real estate attorney in your state when exploring these options to ensure it is done legally.
Why Would a Seller Sell A House With Subject-To Financing or Seller Financing?
Don’t forget I sold my house Subject-To the existing loan, so why did I do this? Because I got paid more, that is why! Here are three scenarios your client may be in that may make a seller finance transaction really attractive!
- They Want Too Much: Realtors, you all have had that client that thinks their house was uniquely blessed and they don’t care what the appraiser tells them. If they’re open to accepting a seller finance option they may be able to offer better terms to investors that make their property attractive to more buyers and the seller could even make more money now by taking interest payments that a bank would normally benefit from.
- Bought The House Recently: In some cases a client bought a house and the market hasn’t appreciated enough to cover expenses like commissions, closing fees etc. and they would have to pay money out of pocket just to walk away from their house. It doesn’t even require the value of the house to go down for this to happen. This puts sellers in a tough situation especially if they are being forced to move for work or family situations they need to move for. A subject to transaction can be a great option here because we can close quickly, pay the realtor, title company and often put some cash in the seller’s pocket whereas they may have planned to lose money on a transaction.
- The Client Says the “R” Word: After a stale listing in a cold market your client might start to ask you, how do I rent a property out? They never intended to but they don’t like paying two mortgages and something has to give… As a realtor, that sucks because you spent tons of time, money and energy into getting the listing up and marketed now you might not even recoup your costs if your only getting commission on half of one month’s rent.
In summary Seller financing or subject-to offers are not for everyone however there are several clients that you will come across in your career that may actually benefit from these terms and would like to have someone educate them on how this could help them in their situation. If we can help you answer questions or position this for one of your listings please let us know how we can help! Call us or fill out a form on our site.