By Beau Ruff
If a person proposes to sell real property (land, house, buildings, etc.), the best option is to receive a full cash offer. In this case, whether some or all of the purchase price is financed, the seller still receives all of the value of the property at closing and the seller’s risk of non-payment is non-existent. But, in many circumstances, the buyer cannot obtain traditional bank financing, or any other kind of financing to buy the property. Or perhaps the buyer can get traditional financing, but for only a portion of the total purchase price. In this less-than-perfect scenario, the option for the seller is to agree to finance a portion of the purchase price. In the event the seller agrees to do so, the seller needs to ensure that the seller is protected against the buyer’s default and risk of non-payment.
First, a couple of thoughts on terms of the seller-provided financing. It is reasonable for the seller to charge an interest rate higher than traditional banks as the seller is taking on additional risk. If the banks won’t loan to the buyer at the bank’s preferred rates, then neither should the seller. Also, generally the seller wants the repayment period to be as short as possible to reduce the risk to the property and to reduce the risk of non-payment. Finally, the seller should require a sizeable down payment to be able to handle any enforcement actions.
Anytime the seller agrees to finance a portion of the purchase price of the seller’s property, the seller needs to ensure that the seller can be made whole in the event of non-payment.
This is accomplished by taking a security interest in the asset (land) being sold. This can be accomplished through one of three main ways: mortgage, deed of trust or real estate contract.
Keep in mind that each security interest is not available in every case (e.g. can’t use deed of trust for agricultural property). Let’s focus on the real estate contract.
Although a seller should always work with an attorney, the state’s Limited Practice Board provides a wonderful starting point for a seller interested in selling property on a real estate contract with the example Form LPB 45 Real Estate Contract (available through www.wsba.org).
The contract is a powerful tool for sellers for many reasons. It provides robust rules and restrictions on the buyer to effectively protect assets until the buyer is paid in full. Do you want to ensure the buyer makes no alterations to the property without seller’s permission? It’s in the contract. Do you want to ensure the buyer pays all taxes and assessments and if the buyer fails to pay, ensure the seller can pay and demand reimbursement from buyer? It’s in the contract.
Need to hire an attorney to enforce the provisions of the contract? The contract provides that the buyer pays the seller’s attorney fees in any enforcement action.
The biggest fear for any seller is the buyer’s non-payment of the amounts owed. If this should occur, the seller wants to be in a position to quickly act to protect the seller’s balance owing. The real estate contract allows the seller to not only sue the buyer for delinquencies, but also provides the important right to seize the collateral which secures the debt (i.e., take back the property that was sold).
Perhaps the biggest reason to use the contract is the speed with which the seller can take back the property in the event of default. This procedure is called forfeiture.
Real estate contract forfeitures are governed by Washington law under RCW 61.30. As a prerequisite to taking the property back through forfeiture, the following are required: the contract must be recorded; there must be a breach of the contract; and the contract must contain a forfeiture clause.
The first step after the prerequisites have been met is to give the notice of intent to forfeit. The notice must be recorded, and it must also be served upon the buyer and potentially others.
Generally, it would take about 90 days after the notice is recorded to cancel the real estate installment contract with a declaration of forfeiture.
The buyer has the opportunity to cure the default within the 90-day period by paying all costs itemized on the notice of intent to forfeit, which includes all amounts delinquent plus the costs of enforcing the seller’s rights.
If the buyer fails to cure, then the general effect of a forfeiture is that it terminates the real estate contract, ends both parties’ rights and duties under that contract, and allows the seller to retain any payments received before forfeiture. The seller is authorized possession of the premises 10 days after the declaration of forfeiture is recorded.
All this means the seller can take back possession within as little as 100 days. While that might seem like a long time to some, in the world of lawsuits, it is lightning quick. And, the faster the seller can take back the property the better.
About Beau Ruff:
Attorney Beau Ruff works for Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick, where he focuses on assisting clients with comprehensive planning.