Pondering Seller-Financed Deals
The current state of the economy and its impacts on bank lending make seller-financed transactions more and more attractive to both buyers and sellers of real estate, whether they are young entrepreneurs or seasoned business persons.
Sellers may earn a better return on their money by acting as the bank in these transactions, as well as creating a larger pool of potential buyers for their property, while buyers avoid the costs and delays associated with bank lending. Additionally, buyers of seller-financed property often enjoy flexible terms and conditions that make the purchase possible.
Typically, a seller seeks to secure a buyer’s promise to repay the loan with either a mortgage, deed of trust, or real estate contract. Each of these types of security devices pose different advantages and disadvantages, depending on the intent of the parties and the type of property being bought or sold.
Buyers and sellers should carefully consider which type of security device best suits their needs.
Many people generically refer to any security device as a “mortgage,” however, a mortgage is a specific instrument, which differs from a deed of trust or a real estate contract. In the event of a default, a mortgage holder may only foreclose through the courts, which provides buyers with the protection of judicial oversight and disposition.
By contrast, the requirement to foreclose through the court system often increases both the time and cost to the seller.
However, in the event of a default, a mortgage foreclosure often preserves the ability of the seller to pursue a deficiency (i.e., a shortfall in the amount recovered by the seller). As a seller, you may want to preserve this ability. As a buyer, you may prefer the seller have no ability to pursue a deficiency judgment after foreclosure.
Deeds of Trust
The most common security device used in the state of Washington, the deed of trust, may be foreclosed either judicially (through the courts) or nonjudicially (outside the court system). The vast majority of deed of trust beneficiaries elect to foreclose nonjudicially, particularly in the context of residential homes.
The nonjudicial foreclosure process generally offers a faster and less expensive means to foreclose than the judicial foreclosure process.
However, without the supervision of the courts, the potential for errors in the foreclosure process increases dramatically. Much of the recent news headlines regarding so-called “wrongful foreclosures” involved nonjudicial foreclosures of deeds of trust.
A nonjudicial foreclosure of a deed of trust also eliminates the ability of a seller to pursue a deficiency against a buyer, except in the context of certain commercial loans. Typically, the seller takes back the property upon completion of the foreclosure, but nothing more.
Real Estate Contract
Use of real estate contracts is much more prevalent on this side of the state, primarily because real estate contracts can be used to secure agricultural property, unlike deeds of trust.
In the event of a default, a real estate contract may be “forfeited” as opposed to “foreclosed upon,” which similarly results in the secured party taking the property back. A seller on a real estate contract accomplishes a forfeiture by following a statutory nonjudicial process, which differs from both mortgage and deed of trust foreclosures.
Typically, in the event of a default, a seller may accomplish a real estate contract forfeiture more quickly than either a mortgage or deed of trust foreclosure.
As a seller, you may favor a device like a real estate contract that provides less opportunities to cure a default. On the contrary, a buyer may favor a security device that provides more opportunities to cure.
In today’s economic and lending environment, many buyers and sellers are opting for seller-financing. A wise seller and buyer should seek the advice of experienced legal counsel to help ensure that the security device used matches the parties’ intent and type of property being secured.