Options for financing a home sale to a friend
Q. I have a friend who wishes to purchase from me a house that I own. He is asking for some sort of seller financing. He proposes either Articles of Agreement for Deed or a conventional sale with me holding a mortgage. He tells me it makes no difference to him.
What is the difference between these financing methods and which way do you think I should go?
A. Articles of Agreement, also known as an installment contract, usually provide the purchaser to make a down payment then pay the balance over a negotiated period of time and interest rate. For example, property is sold for $200,000, purchaser deposits $30,000 with the seller, then makes payments on the $170,000 balance over three years, at 7% interest, amortized over 30 years, with a balloon payment after three years. Purchaser would make payments to seller of about $1,130 per month based on the above interest rate and amortization period. In addition to this monthly payment, purchaser would pay seller 1/12th of the annual property taxes and insurance premium for the property.
After three years, purchaser would be required to pay the remaining balance, through another financing source or cash. If neither of these options are available, purchaser either negotiates an extension of time to refinance the property or loses the deposit and all payments made and seller recovers the property.
During the period that purchaser is making payments, title to the property does not transfer to purchaser. This does not occur until the full purchase price has been paid.
Advantages to the seller: In the event the purchaser cannot complete the transaction per the agreement, it is generally easier to terminate the installment contract and recover the property than if title to the property was transferred through a conventional deed and mortgage. When title is transferred, seller must initiate foreclosure proceedings to recover the property, generally more complicated and time consuming. Once an installment contract is terminated, likely the only court proceeding that may be involved would be an eviction to remove the purchaser from the property, a far simpler proceeding than a mortgage foreclosure.
One note: In the event the installment contract term is over five years or once the purchaser owes less than 80% of the purchase price, the property must be formally foreclosed by seller in the event of a purchaser default.
Disadvantages to seller: As title remains in seller’s name, so does any potential liability involving the property. Seller remains potentially liable for property defects or any environmental issues. Also, in the event purchaser hires contractors to perform work at the property and fails to pay, mechanics liens may be recorded against the property which may ultimately become the responsibility of seller.
A conventional sale and mortgage is similar to what occurs when most of us buy a house. A deed is executed by the seller conveying title to the purchaser. Purchaser executes a note and mortgage in favor of the seller and the mortgage is recorded. As in the installment contract, terms and if applicable, a balloon payment date are negotiated.
This version eliminates much if not all potential seller liability regarding the property. Any mechanics lien issues would likely remain the purchaser’s obligation. Also, in the event the seller suffers a financial loss as a result of the foreclosure, a deficiency judgment may be obtained against the purchaser. The major disadvantage, as stated above, is that recovering the property is generally far more complicated and costly than terminating an installment contract.
I would certainly suggest reviewing these options with your attorney to determine your best course of action.
• Send your questions to attorney Tom Resnick, 910 E. Oak St., Lake in the Hills, IL 60156, by email to tom@thomasresnicklaw.com or call (847) 359-8983.