If a person proposes to sell real property (land, house, buildings, etc.), the best option is to receive a full cash offer. In this case, whether some or all of the purchase price is financed, the seller still receives all of the value of the property at closing and the Seller’s risk of non-payment is non-existent. But, in many circumstances, the Buyer cannot obtain traditional bank financing… or any other kind of financing to purchase the property. Or perhaps the Buyer can get traditional financing, but for only a portion of the total purchase price. In this less-than-perfect scenario, the option for the Seller is to agree to finance a portion of the purchase price. In the event the Seller agrees to do so, the Seller needs to ensure that the Seller is protected against the Buyer’s default and risk of non-payment.
First, a couple of thoughts on terms of the Seller-provided financing. It is commercially reasonable for the Seller to charge an interest rate higher than traditional banks as the Seller is taking on additional risk. If the banks won’t loan to the Buyer at the bank’s preferred rates, then neither should the Seller. Also, generally the Seller wants the repayment period to be as short as possible to reduce the risk to the property and to reduce the risk of non-payment. Finally, Seller should require a sizeable down payment to be able to handle any enforcement actions.
Anytime the Seller agrees to finance a portion of the purchase price of the Seller’s property, the Seller needs to ensure that the Seller can be made whole in the event of non-payment. This is accomplished by taking a security interest in the asset (land) being sold. This can be accomplished through one of three main ways: (1) Mortgage; (2) Deed of Trust; (3) Real Estate Contract. Keep in mind that each security interest is not available in every case (e.g. can’t use Deed of Trust for agricultural property). The focus of this article is the Real Estate Contract.
Although a Seller should always work with an attorney, the Limited Practice Board for the State of Washington provides a wonderful starting point for a Seller interested in selling property on a Real Estate Contract with the example form LPB 45 Real Estate Contract (available through www.wsba.org).
The Real Estate Contract is a powerful tool for Sellers for many reasons. It provides robust rules and restrictions on the Buyer to effectively protect your asset until you are paid in full. Do you want to ensure the Buyer makes no alterations to the property without Seller’s permission? It’s in the contract. Do you want to ensure the Buyer pays all taxes and assessments and if the Buyer fails to pay, ensure the Seller can pay and demand reimbursement from Buyer? It’s in the contract. Need to hire an attorney to enforce the provisions of the Real Estate Contract? The contract provides that the Buyer pays the Seller’s attorney fees in any enforcement action.
The biggest fear for any Seller is the Buyer’s non-payment of the amounts owed. If this should occur, the Seller wants to be in a position to quickly act to protect the Seller’s balance owing. The Real Estate Contract allows the Seller to not only sue the Buyer for delinquencies, but it also provides the important right to seize the collateral which secures the debt (i.e. take back the property that was sold). Perhaps the biggest reason to use the Real Estate Contract is the speed with which the Seller can take back the property in the event of default. This procedure is called Forfeiture.
Real estate contract forfeitures are governed by Washington Law under RCW § 61.30. As a prerequisite to taking the property back through forfeiture, the following are required: (1) The contract must be recorded;(2) There must be a breach of the contract; and (3) The contract must contain a forfeiture clause.
The first step after the prerequisites have been met is to give the Notice of Intent to Forfeit. The Notice of Intent must be recorded, and it must also be served upon the Buyer and potentially others.
Generally, it would take approximately ninety days after the Notice of Intent is recorded to cancel the real estate installment contract with a declaration of forfeiture. The Buyer has the opportunity to cure the default within the ninety-day period by paying all costs itemized on the Notice of Intent to Forfeit (which includes all amounts delinquent plus the costs of enforcing the Seller’s rights). If Buyer fails to cure, then the general effect of a forfeiture is that it terminates the Real Estate Contract, ends both parties’ rights and duties under that contract, and allows the Seller to retain any payments received before forfeiture. Seller is authorized possession of the premises ten (10) days after the declaration of forfeiture is recorded.
If you are counting the days, you will see that the Seller can take back possession within as little as 100 days. While that might seem like a long time to some, in the world of lawsuits, it is lightning-quick. And, the faster the Seller can take back the property the better.
- Licensed, not practicing.
The opinions voiced in this material are for general information only and not intended to provide specific advice or recommendations for any individual or entity. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Cornerstone Wealth Strategies, Inc., a registered investment advisor and separate entity from LPL Financial.