By Elliott Topkins, Esquire
7/28/11
I recently experienced a residential real estate transaction that continues to confound. The seller was an elderly person on a street which was in “transition.” That is to say, an entire group of homeowners had reached an age when independent living was strenuous, and there were apparently independent decisions by many homeowners to sell their homes. Since this decision was made when there were no longer any mortgages or other liens on the property, the entire net proceeds could be utilized to pay for alternative housing elsewhere.

My involvement in the transaction started out as more or less routine. The seller retained me to draft a purchase-and-sale agreement, prepare a deed for the property and attend the real estate closing, which would follow after the buyer had arranged mortgage financing for the purchase. This is the same thing I do every day.

When we reached the closing date set forth in the purchase and sale agreement for delivery of the deed, however, the buyers informed the seller that they were not ready to close because their mortgage lender was not ready. This seemed strange, since the buyers were putting down more than half of the sale proceeds as equity.

As time progressed, it became more and more evident that the mortgage lender was not going to deliver mortgage proceeds. This placed the transaction in jeopardy, and the seller was faced with the unpleasant prospect of ending the transaction and retaining the buyers’ deposit as liquidated damages. The home would need to be placed on the market again.

My seller was not anxious to take this course. The solution: “seller-provided financing.” In effect, my seller “loaned” the buyers enough money to close at the full purchase price:
1. The buyers signed a promissory note, with an interest rate that was fair, but designed to give the buyers impetus to obtain alternative conventional financing.
2. The promissory note is secured by a mortgage to the seller, executed by the buyers at the closing.
3. The buyers now own the property, subject to the mortgage to my seller.
4. The buyers pay me a fee for providing the note, mortgage and certifying title to them.
5. Until the promissory note is paid in full, the seller receives a monthly payment of principal and interest, with an interest rate far in excess of what could be obtained with other secured investments.
There is risk involved in a transaction like the one I have described. On the other hand, my seller received the substantial amount of equity, which the buyers were prepared to put down with the transaction involving their mortgage lender. In the event that the buyers defaulted, there is likelihood that a foreclosure sale would net sufficient proceeds to satisfy the note obligation. While not a “way out” for everyone, seller financing may prove a means to “save the deal” and may be a viable alternative to more radical solutions, when the circumstances are favorable.