Impact of the SAFE Act on Owner Financing

Owner Financing, also called Seller Financing, is where the Seller agrees to finance part or all of the purchase price of a house to help the Buyer purchase the real property and complete the sale. It is a creative financing method that allows the Seller to assist the Buyer who is usually unable to obtain a conventional loan through a bank or mortgage company the Seller will use Owner Financing to help the Buyer purchase house. I use the "usually" because this is not always the case.

Bank and mortgage companies basically just run the numbers and are required by law to adhere to strict guidelines. For many people, these numbers and guidelines prevent them from obtaining the financing they need to purchase a house or achieve their real estate investing goals. They fail to qualify for financing for any number of reasons - from lack of time on a job to unsatisfactory items on your credit report and so on. These myriad of restrictions make Owner Financing an attractive and viable option.

Owner Financing depends mainly on the amount the owner, i.e. the Seller is willing and able to finance, and the amount of time the Seller will be willing to extend the Buyer credit to pay off the private loan. Most often it is easy for a Buyer to qualify for this kind of financing because the Seller or owner is not restricted by the same laws and regulations as institutional lenders. The Seller is a private lender. Owner financing can be offered with no credit checks, zero down payments, and very little paperwork.

The Buyer should keep in mind that the Owner financing note is almost always short-term (like about 5 years). The Seller could require interest-only payments with a balloon payment in the amount of the principal as a final payment. The Seller sets the interest rate. The time period, the interest rate, the loan amount, the number of scheduled payments, etc. Owner Financing is very negotiable and takes shape in a variety of contractual agreements.

The most common types of owner-financing arrangements are:

• AITD or All-inclusive trust deed (or mortgage): The seller creates a promissory note and mortgage for the entire balance of the house price, less any down payment.


• Assumable mortgage: Assuming a mortgage is when the buyer can takeover and pay the remaining payments on an existing mortgage. Not as common as many buyers would like this to be, but it does happen.


• Rent-to-Own or Lease option: In a nutshell, the seller rents the property to the buyer with an agreement to sell the property to the buyer at a future date. Generally, a percentage of the rental payments are credited against the purchase price. There are countless variations of lease-option agreements.


• Land Contract or Contract for Deed: This is a financing arrangement or installment contract, where the Seller agrees to financing and retains the legal title until the buyer has made all payments in full. When the buyer makes the final payment, the buyer gets the deed. In the interim the buyer has what is called "equitable title," a temporarily shared ownership.


• Second mortgage or Junior mortgage: The Buyer may only be able to obtain bank financing for say 80% of the house's value and the Seller extends credit to buyers for the difference. The bank holds the first lien position and the Seller is carrying a second or "junior" mortgage for the balance of the purchase price (less any down payment), in the second lien position. The positions refer to which debtor will be paid first if the Buyer defaults. If you hear the term Purchase Money Mortgage (PMM) , often (but not always) it is in reference to this form of real estate financing.

The owner finance notes should be secured by the property so the Seller (private owner/lender) can foreclose if the Buyer defaults. The Seller (should) record the private mortgage (called "trust deed" or "deed of trust" in some states) with the county public records. Some Sellers utilize a loan servicing company to prepare the mortgage papers, mail statements to the buyers, collect payments, and perform other administrative loan processing functions.

E. Alan Cowgill is a respected author, consultant and speaker on the topic of private lending. In his response to a question concerning the impact of the Safe Act on private lenders, he advised that several states have passed more stringent laws on the SAFE ACT which can impact the private lender in those states.

So even though a Seller who chooses to create a private note to sell their piece of real estate may not be required to adhere to the same strict guidelines as institutional lenders, they must determine the state's requirements concerning loan origination pursuant to the SAFE Act, and adhere to those. In some states a private lender must be licensed to offer a residential mortgage loan to a consumer. If the property for sale is not a home where the Buyer will live or reside, the SAFE Act may not apply. Thank you, Mr. Cowgill. **Important Safety Tip!**

"There are no universal requirements mandated for seller financing. In order to protect both the buyer's and seller's interests, a legally-binding Purchase Agreement should be drawn up with the assistance of an attorney and then signed by both parties." (Source: "Seller Financing." Wikipedia, the Free Encyclopedia. Web. 20 May 2011.)

An attorney or other qualified professional experienced in seller financing should thoroughly examine all the necessary paperwork. Also, the Seller should seek the advice of a financial or tax expert on reporting and paying taxes on an owner-financed real estate deal, as this can be complex. Owner financing can benefit both Seller and Buyer but can also be disastrous for either or both parties if professional assistance is not obtained.

Finally, Sellers should keep in mind that there is a secondary market for a properly structured owner financed debt instrument. Note investors are looking to purchase these negotiable instruments. So when creating an owner finance note, structure the loan agreement so that the instrument not only appeals to the property Buyer but would also be of interest to a Note Investor, who will make you an attractive cash offer for your future income streams, as well.

Not only are they still safe to create in order to sell your property, but note investors are still willing to buy your note.

Many note investors (or note buyers) are eager to pay cash for real estate notes at a price which represents the note's present value. So if you used seller-financing to sell your real estate but would like to receive a lump sum of cash instead of collecting scheduled payments, don't worry because there are plenty of note buyers out there.

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