Real Estate Law Corporation
Seller Financing in a Real Estate Transaction
Seller Financing in a Real Estate Transaction
Seller financing (a.k.a. “Seller Carryback”) is often used in residential and commercial real estate transactions. It is an extension of credit offered by the seller to help assist the buyer with paying the purchase price of the real estate being sold. A seller may carry all or a portion of the purchase price. The seller financing can be structured in a variety of ways and will generally require involvement of a real estate agent, title or escrow company, a tax professional, and a real estate attorney. Seller financing can involve large sums of money, therefore it is essential that a seller and buyer retain an experienced real estate lawyer in any seller financing transaction.
Considerations in Seller Financing Transactions
- Will the Promissory Note be secured by real property?
- Will the Promissory Note be in first, second, or even third position?
- Will the loan be fully amortized and be a “straight” note?
- Will the loan involve balloon payments?
- What interest rate will apply to the loan?
- Will the loan be subject to a “due on sale” clause?
- Is the loan securing residential or commercial property?
- Will the seller need a Lender’s Title Policy?
Key Documents in a Seller Financing Transaction
The key documents in a seller financing transaction include: (1) Purchase Agreement; (2) Promissory Note; and (3) Deed of Trust. Depending on the particulars of the financing arrangement, other documents may also be needed. The purchase agreement will include the details about the seller financing arrangement between the buyer and seller.
In sales involving seller financing, the purchase agreement will contain the specific financing arrangement between the buyer and seller. Although the purchase agreement may contain the specific financing arrangement between the parties, a separate promissory note and deed of trust will generally be required and these documents will contain much more detail.
A promissory note is a financial instrument which contains a written promise by one party (borrower) to pay to another party (lender) a definite sum of money as specified. A promissory note can be structured as: (1) Installment Note; (2) Interest Only Note; or (3) Straight Note. An installment note is the most common and calls for a set amount of monthly principal and interest payments over the term of the note. An interest only note generally calls for monthly interest only payments and the entire principal is paid at a specified maturity date. A straight note calls for the entire amount of principal and accrued interest to be paid in a single lump sum at a specified due date. Unlike an installment note, a straight note does not include periodic payments of principal.
For sellers, it is important to realize that a promissory note by itself does not place a lien on the property and does not provide the power to foreclose on the property if the buyer defaults on its obligations under the promissory note. As noted below, the “power of sale” to initiate a foreclosure on the property for non-payment is contained in the deed of trust.
Deed of Trust
A deed of trust is a document that conveys title to real property to a trustee as security for a loan until the grantor (borrower) repays the lender according to the specific terms of a promissory note. The signature(s) on the deed of trust must be notarized and the deed of trust must be recorded in the county where the real property is located. It is also imperative that the deed of trust contain an accurate legal description of the appropriate real property.
A deed of trust should grant the trustee with the power of sale. The power of sale clause will allow a trustee to foreclose on the property if the borrower defaults on the terms of the promissory note. A deed of trust should also contain a number of other provisions to protect the seller/ beneficiary, including but not limited to:
- Due on sale clause, which requires the borrower to pay the full amount of the note when selling the property to another party.
- Requirement that the borrower maintain and keep the property in good condition and repair.
- Requirement that the borrower maintain adequate insurance on the property.
- Requirement that the borrower pay all real property taxes before they become delinquent.
Balloon Payment Notice Requirements In California
In California, on notes secured by owner-occupied 1-to-4-unit residences, the borrower must be given a notice stating the due date of a balloon payment at least 90 days before any action may be taken to enforce collection of that payment. Civil Code §2924i. Civil Code §2966 imposes similar requirements on balloon payment notes given by the seller of a 1-to-4- unit dwelling in which there is an “arranger of credit.” The notice must include the all of the details about the balloon payment, including the name and address of whom the balloon payment is required to be made, due date of the balloon payment, the amount, and if applicable a description of the trustor’s right to refinance.
When a balloon payment notice is required, the following key provision from the Civil Code must be appear on the actual Note:
This note is subject to Section 2966 of the Civil Code which provides that the holder of this note shall give written notice to the Trustor or his successor in interest of prescribed information at least ninety and not more than one hundred and fifty days before any balloon payment is due.
Why You Should Use a Real Estate Attorney When Structuring a Seller Carryback Loan
The requirements in a seller financing transaction can vary based on how it is structured and whether it is to secure residential or commercial property and involves a balloon payment. A real estate attorney representing a seller will ensure that the proper financing documents are drafted with the precise language that will protect the seller and ensure that the proper documents are recorded to ensure the seller secures the loan with a deed of trust against real property.
A real estate attorney representing the buyer will ensure that the financing documents do not unreasonably restrict the buyer’s intended use of the property.
Real Estate Finance Attorney
If you need legal assistance with a real estate transaction that involves seller financing, Real Estate Law Corporation has experienced real estate finance attorneys that serve clients in the greater Sacramento area and all over California. Real Estate Law Corporation regularly drafts seller financing documents for residential and commercial real estate transactions and also handles non-judicial foreclosures.