What Are Your Options if You’re Unable to Get Financing?

Some of us who are selling Real Estate, whether it be our home or other property, may find that we have an interested buyer who may not be able to get financing. Or we may be a Buyer who already knows it is not possible (at the present time) to get financing.

Is all lost? Not necessarily. I was involved in a recent sale of a 40 acre seasonal property (we call it a “camp” in Michigan’s Upper Peninsula) that had access on a secondary road (not County maintained) that required Crossing State Land.

In Michigan, until just recently, it was difficult, if not impossible, to get legal easement for ingress and egress through State owned land. It is now possible but time consuming and expensive.

None of the banks would finance the property because the title insurance made exception to “right of egress and ingress”. In other words the land is legally land locked even though the present owner and other property owners in the area used the road to get to their property and have been doing so for well over 75 years.

The asking price of the property was $116,000, we agreed on a sale price of $100,000 with $30,000 down, interest rate of 6%, with payments of $425.00 monthly for the first 8 payments. The 9th payment would be for $20,425.00. Payments 10 through 17 would be at $425.00 and the contract would balloon with the total balance due on the 18th payment.

I bring this up because owners financing, whether it be a “Purchase Money Mortgage” or “Land Contract” is sometimes overlooked when it should be considered.

When structured properly it can be a way to put the deal together and sometimes be a better alternative than having all the cash at time of the sale.

In this case it was. The seller had owned the property for over 40 years, it was paid for. If he took the all cash from the sale he would first have to decide what to do with it.

Where to invest it, stocks, bonds, annuities, bank certificates of deposits, each has it own risks and rewards, but all require some or a lot of study, or relying on someone else to make suggestions.

So why not invest in the property he is selling, he certainly knows what he’s getting.

When I met with the seller I told him there were five points that have to be considered when negotiating a Land Contract.

One of course is the price, the other four would be down payment, interest rate, balloon payment and amortization period or dollar amount of the payment.

From a Sellers stand point we want the highest price possible with the largest down payment, highest interest rate, the balloon payment due in the shortest period of time and the payments as high as possible, which will results in a short amortization period.

On the other hand the buyer may want just the opposite.

So if we are selling or buying we should understand we can not always have it our way. It may be better to give a little on the price if we can get a higher interest rate, or vice versa, or how about smaller payments but having the balloon payment come due quicker.

Everybody was happy and we proceeded to close the sale.

But there are other considerations now that there is no bank involved.

One is who keeps track of the amount of interest each payment and the principal balance.

This particular sale has an unusually short period of time when the balloon comes due, but even then if payments are due on the 5th of the month and the buyer mails the payment on the 3rd, but the seller does not receive it until the 6th, each party may record the payment being made on a different date. When the balloon comes due there may be a misunderstanding regarding the amount of the balloon payment.

It is better to arrange for a lending institution to accept payments on the Land Contract and the Land Contract should have language that says the banks records regarding principal balances and interest will be accepted as correct by the buyer and the seller.

There should also be a separate account set up to accept payments for Real Estate Taxes and Hazard Insurance. This account should be in both the seller’s and buyer’s names with instructions to the bank that the money can only be withdrawn with both parties’ signatures and only then only to pay taxes and insurance.

The banks instructions should also state that they are to make the money order payable to the taxing authority or to the Insurance Company.

Further instructions should state that the tax and insurance escrow account will belong to the seller if the buyer defaults or to the buyer when the Land Contract is paid off.

With a Land Contract there are always two closings.One when the land contract is started and the second when the Contract is paid off.

I always encourage the seller to execute the Deed at the first closing and to have it held by an Escrow Agent to be delivered to the buyer at the second closing when the Land Contract terms have been satisfied.

Anything that may be misunderstood in the future (and the longer the time the Land Contract is in force the greater the chance for misunderstanding) should be addressed in detail in the Land Contract such as, terms regarding escrow agent and instruction, collection of payments, who pays for what in the first closing and what expenses are paid by who in the second closing.

One area that we find easier to deal with at the First Closing is State Transfer taxes that are due when the Deed is delivered.

This money is sometimes better to be paid and held in escrow at the first closing with the party responsible to pay it (usually the seller) giving the money to the escrow agent.

As time goes on, even though the Land Contract states who is responsible, we have found people still say they don’t remember or they were not informed.

These are some of the things I feel should be taken into consideration with owner financing. I am sure there are others as each case is different.

This is not intended to give legal advice, only to show what was done in this case. It is recommended that you seek advice form your own attorney before proceeding to do anything on your own.

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