What do I need to do to avoid problems with a seller financed property?
Posted on February 28th, 2010 by admin
I am looking at purchasing a commercial property and the seller is offering financing. The realtor that is representing the property works for one of the major realty companies. The financing requires a 10% down payment, 25 year amortization, and an APR a little above what is currently normal, which seems in line for the terms generally associated with seller financing.
What are the pitfalls I need to be aware of before getting into an arrangement like this and how can I avoid those pitfalls? I’m going to be contacting legal counsel and such on Monday, but I’d like to have a list of questions and potential answers before then.
Any help would be greatly appreciated.
There is only one question that needs to be answered. Will title be passed at the closing of the loan (when all documents are executed) or when the financing has been completely been paid off? If the answer is that title will be transferred at the end of the financing period (25 years later) you are running a major risk with all kinds of pitfalls to numerous to list here. If the answer is that title will be immediately transferred than it is going to be a pretty normal transaction as if you were getting a loan from a conventional lender. just make sure you give your lawyer ample opportunity to go over each line of the contract and mortgage with you so that you fully understand what is at stake and the remedies for possible unforeseen situations. Good Luck and Congratulations!
February 28th, 2010 at 1:43 pm
Yes having your lawyer draw up the agreement to protect your rights is the proper course.
You need to cover the eventuality if owner fails to pay property taxes or dies before terms are completed. You want an agreement that his estate must honor.
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February 28th, 2010 at 2:26 pm
Please, please, please, pretty please with a cherry on top – get some legal advice.
Hire a real estate attorney to REPRESENT you and your INTERESTS.
Do not rely on the buyer, or any of the buyers representatives (including any real estate agents) to look after your interests.
Do not take a risk and ruin your credit or put yourself in a position that will make you regret your actions.
Take care of your legal interests. Most attorneys will consult for a free initial consultation.
Peace.
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February 28th, 2010 at 3:06 pm
I only have a few things to add, 1) MAKE SURE you can do the type of work you want to do at that location.(Zoning), That it is acceptable at that location. Before signing anything. Make sure ALL your agreements are in writing. (Verbal agreements don’t count) Remember the 25years is a contract so you will have to make a plan for your business. (The business usually won’t make money the first couple of years, so you should be prepared to cover bills when the business is struggling.) Also if the owner is financing, All improvements you make will be his if your business folds, so only do required changes until the business is on solid ground. At this point in time loans are in fluctuation so you may want to keep your eye out for better financing after about 5years. It will take this long to set a prov en record to a better loan deal. Last thing, I don’t know what type of business you plan, but search it’s track record in the type of area you will be working in.(Just because they fail don’t mean you will, but it may help you in planning certain options). If you are in a service business, check the competition, and the availability of your customers to get to you. That is why you check other same type business. Just a few thoughts hope you enjoy the future.
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February 28th, 2010 at 3:46 pm
There is only one question that needs to be answered. Will title be passed at the closing of the loan (when all documents are executed) or when the financing has been completely been paid off? If the answer is that title will be transferred at the end of the financing period (25 years later) you are running a major risk with all kinds of pitfalls to numerous to list here. If the answer is that title will be immediately transferred than it is going to be a pretty normal transaction as if you were getting a loan from a conventional lender. just make sure you give your lawyer ample opportunity to go over each line of the contract and mortgage with you so that you fully understand what is at stake and the remedies for possible unforeseen situations. Good Luck and Congratulations!
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Realtor
February 28th, 2010 at 4:00 pm
1) Make sure the guy selling you the property is the owner and that he doesn’t have any other partners on title with him, commercial real estate is notorious for being owned by partnerships and several family members, not just the face you see at the property.
#2) Know all the liens, loans and mortgages on the property, again commercial real estate is notorious for being used as collateral for all kinds of loans and it is also a target for law suits and other liens against the Seller.
If your getting owner financing you really want all other loans and liens paid off other wise you could find your self being foreclosed on by one of the Sellers old creditors. So make sure to find out if they have any exting loans and if they plan on paying them off when you buy the property.
Title Insurance is designed to protect you, the buyer in these kinds of cases but you have to read the paper work to make sure it doesn’t exclude converge of exiting debts (#2). It’s totally possible for them to issue a policy that excludes certin exiting loans and liens, that is, if you ok it.
It might be wise to pay for the Title Insurance your self, that way you know the title officer is looking after your best interest and answering questions honestly before they issue the policy (about$2k-$6k for a modest building) and you ask for a reduction in the selling price equal to the title insurance, or a little less to make it worth his wile…
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