Karen Malanga: Hi, this is Karen Malanga with another episode of House Talk.
Today, I invited Melissa Riverman, our go-to escrow officer from Western Title to visit us because she and I were involved in a seller carry-back transaction that may be going south—it’s a bit stressful. So, I thought it would be good for Melissa to explain to our listeners a little bit about seller carry-back transactions.
Melissa, take it away.
Melissa Riverman: Thank you, Karen. There are couple of different versions of seller carry-back transactions. Let me just explain those a little bit right off the about.
You can do a land sale contract. That is where the deed does not pass to your buyer until that contract is paid off in full. So, that’s one version.
And then, you have your standard note and trust deed, which is more like a bank where the title does pass and the seller then is put on as a lien position on the property—normally, first lien position on the property, but it could be second depending on the circumstances of the sale.
With the contract of sale, let me explain a little bit about that because that’s a little different, a lot different than we’re normally used to as escrow officers cannot prepare that document. It has to be prepared by an attorney.
Karen: That’s super important.
Melissa: Yeah, we cannot do it. They can put different terms in there. Anyway, that is that.
A simple note and trust deed, we can usually prepare. When it starts getting into more difficult terms, more specified terms, we will, a lot of times, turn it over and say, “You really need to have an attorney prepare that because now you’re out of our realm of the easy.”
Karen: Sure! And out of your realm of expertise too (because when you get into payment plans, terms on that loans).
And then, what is the advantage sometimes to the seller? Would it be to perhaps have the property close in another tax year? Would that be one advantage to the seller?
Melissa: I think there are tax qualifications that would apply on that as far as getting paid off. A lot of people don’t want that lump sum of proceeds in that one tax year, so they would do that. So it all depends.
Taxes are kind of not my expertise at all, but I do know there are some advantages to selling that property that way.
Karen: I know from my view point, we see a lot of people approach our bare land listing asking of the seller will carry. And I do think sometimes that’s to facilitate them moving forward on a construction loan because then, it’ll look as though the land is free and clear.
Melissa: Well, they still have the lien on the property. So it would still have the lien on the property.
I think part of it, we went to a world time where we didn’t find many lenders that would lend anymore on bare land. So we had a little issue there. I think more and more of them are loosening up now a little bit. So our buyers can get a land loan. They’re still I think a little more difficult, but they can do it.
And the other version of that is they can always get maybe an all-in-one construction loan when they buy the property at the same time.
Karen: Sure! Do you see many seller carryback transactions get a little murky if the buyer doesn’t make the payment?
Melissa: Yes. And what happens then is, basically, it’s the sellers responsibility to handle that situation, even if they go through a collection company which I strongly urge any time the seller does a seller carryback in a buyer. It’s an advantage to both of them to go through a collection.
The collection does not, unless you want to pay a special fee, do late notices. It does cost extra in a collection account most times. But what they do is they calculate the principal interest, they hold all the fulfillment documents, and there’s no issue between the buyer and seller and how the payments are being applied.
But when a buyer does not make a payment, no matter if it’s through a collection or not through a collection, it’s the seller’s responsibility to either contact that buyer directly or they may feel it necessary to obtain an attorney to contact that buyer for them.
So, it’s a hard situation for a seller on that point on doing a seller carryback and having that responsibility.
Karen: But then, it’s also on the buyer side. If they’re in default, then the seller can end up getting the property back and they’ve wasted that time, money and energy on purchasing the property.
Melissa: Correct! And that’s true too. So, as a seller, they might want to think on how much is that buyer putting down. If they’re putting a substantial amount down, the chances of them walking away from that are a little more slim. If they let them in for hardly anything down, they’ve collected the payments, they can resell the property, but they’re still going to have the attorney fees. They still have to go through and attorney no matter if it’s a note and trust deed or a contract. They still have to go through an attorney to go through the foreclosure process.
Karen: Okay. Wow! I don’t want to do too many of these actually.
Melissa: And they work out well in some instances; it does. What I’ve had lately is it allows that buyer to obtain and rebuild credit. A lot of people went through the bad times. They lost a lot of their credit. This allows them to build that back up because they do have the record in making those payments every month.
And like I said, it allows them to build it up. And then, they can refinance, get out from underneath the seller, pay that seller off, but they’ve built their credit up in order to be able to do that.
Karen: Ah, that’s nice. Well, thank you, Melissa. I love having you here. Again, it’s Melissa Riverman with Western Title, the best escrow officer in Central Oregon.
Melissa: Thank you, Karen.
Karen: Thanks for coming, Melissa.
Melissa: You’re welcome.https://media.blubrry.com/house_talk_bend_oregon_real/p/nestbendrealestate.com/wp-content/uploads/2017/03/Melissa-Riverman-Western-Title-Edited.mp3