Posted by JohnBoy on January 19, 2001 at 12:17:58:
If you sell with owner financing then it should be selling on contract for deed. The contract should only be for 1 - 3 years requiring the buyer to get refinanced or rewrite a new contract if you choose to continue carrying the financing. If you write a contract to carry for a long term then you would more than likely end up having to foreclose vs. evict the buyer in the event they ever defaulted on the payments. You would just write up the contract amortizing the payments at the interest rate you charge over 30 years with the entire balance due within 1, 2 or 3 years. Standard interest rates being charged are between 10% - 12% when selling on contract for deed. Of course, you agree on a lower rate if you wish, but since you are selling on terms then you should get the higher rate.
Title should remain in your name until the contract is paid in full at which time you would then transfer title to the buyer.
Taxes and insurance should be paid by the buyer in addition to the contract amount financed. You would have the buyer pay the first years insurance in advance naming you as loss payee and additional insured. Then figure the annual insurance and taxes that would be owed and divide those over 12 months. The buyer would pay that amount to you every month in addition to the principle and interest payment. The taxes and insurance payments should be held in escrow until the tax and insurance bills come due. The seller would then forward those bills to you each year when they recieve them and you would pay those from the escrow account. Should the tax or insurance bill end up being more than the amount that was escrowed due to any increases then the buyer would have to make up the difference at that time. Then simply adjust the monthly payment due to reflect the increase for the following year. All of this should be spelled out in your contract. By requiring the buyer to pay the taxes and interest to you each month you are guaranteed that those costs will be paid instead of relying on the buyer to save up the money each year.
You would also want to require the buyer to sign over a “quit claim deed” back to you to be held in escrow, in the event they should ever default on the payments. That way if they were to ever default and/or skip town you can record the “quit claim deed” releasing any of the buyers interest in the property. Then you would just file for eviction vs. dealing with having to foreclose which could take up to a year depending on your state laws.
Every state has different laws pertaining to selling on contract for deed.
For example, in my state, as long as the contract for deed is for LESS than 5 years AND the buyers have LESS than 20% equity in the property, we can just evict them like you would a tenant renting vs. having to go through a judicial foreclosure, which would be more costly and time consuming than a regualr eviction. If the contract for deed is for more than 5 years and the buyers ends up with 20% or more in equity, then we must foreclose vs. evicting.
If you are not familar with contract for deeds then you should use a good real estate attorney to handle drawing up the contract for you so your interests are properly protected. Do NOT skimp on this and just assume things would probably work out OK. If not done properly you could end up facing your worst nightmare should the buyer ever default. Spend the $300 now for the attorney and protect yourself! Have the buyer pay any cost involved up front as closing costs to get the deal!