Seller Financing in Real Estate Transactions: A Seller’s Options when the Buyer Cannot or Does Not Want to Obtain a Conventional Mortgage

Are you a homebuyer or seller in Colorado? Are you aware of the various financing options available beyond conventional mortgages? Have you ever thought about Seller Financing to secure your transaction? GLO is dedicated to providing guidance to homebuyers and sellers, helping them explore their options to maximize their investment and ensure they fully comprehend one of the most significant financial decisions of their lives.

Seller financing is an alternative method for the purchase of real estate where the seller of the property provides the buyer with financing, usually by way of express terms, rates, and conditions for purchase of the property. Instead of using a bank, other private lender, or mortgage originator, the seller finances the purchase price of the property. Seller financing is generally used when a homebuyer is unable to secure traditional financing for the purchase of real estate. There are three ways to offer a seller financing deal: (1) a wrap-around mortgage, (2) an installment land contract, or (3) a lease to purchase arrangement.

What are Wrap-Around Mortgages?

A wrap-around mortgage, commonly referred to as a ‘wrap loan,’ is when a homeowner who has a pre-existing mortgage on their property extends a junior mortgage to a buyer that is then “wrapped around” the seller’s pre-existing mortgage. In this situation, the seller takes on the role of the lender. The buyer and seller agree to a down payment and loan amount, sign a promissory note that lays out the terms of the mortgage, and then the title and deed pass on to the buyer. The buyer will then make monthly payments directly to the seller, often at a higher interest rate than the original mortgage (allowing for the seller to make a profit). It is important to understand that the buyer is not assuming responsibility for the homeowner’s pre-existing mortgage on the property, the seller retains this.

A seller should know the terms of their pre-existing mortgage before engaging in a wrap-around mortgage. Many mortgages contain ‘due-on-sale’ clauses, however, banks generally do not exercise this right if payments are still being made. Buyers should know the wrap-around is junior to the original mortgage. This presents risks for the buyer, but the proper arrangement can help avoid any issues and presents an opportunity to obtain otherwise unobtainable financing.

What is an Installment Land Contract? 

A wraparound installment land contract (aka “contract for deed”) is the same as a wraparound mortgage except the title remains in the seller’s name until the debt is paid in full. However, the buyer assumes possession of the property and the rights and responsibilities of ownership. Typically, the seller signs a deed that is placed in escrow with a title company to ensure that the buyer will get title if the seller disappears.

Upon default of the land contract, the legal process for the seller getting the property back is unclear under Colorado law. The court could allow a forfeiture of equity and permit an eviction by the seller, or the court could require a judicial foreclosure (sometimes a long and expensive process).The court’s decision is based on equitable factors, what is fair in the situation considering the buyer’s equity (size of down payment, accumulated equity, improvements, etc.).

What is a Lease to Purchase?

The third seller financing option is a lease to purchase. Some contract lease agreements provide the buyer with the option to purchase the home at the termination of the lease while others require the purchase. A prospective home buyer should understand the agreement they sign. In these arrangements, the buyer pays the seller a one-time, usually nonrefundable, upfront fee called the option fee, option money, or option consideration. This fee is what gives the buyer the option to buy the house by some date in the future. The option fee is often negotiable; the purchase price can be agreed upon when entering the lease or prior to the sale.

How GLO Can Help

For Colorado homeowners considering seller financing, whether as a buyer seeking alternative paths to homeownership or a seller looking to expand their market, the complexities involved demand experienced legal guidance. At GLO, we specialize in meticulously crafting and reviewing these nuanced agreements, ensuring your interests are protected and your transaction proceeds smoothly. Visit Seller Financing: A Practical and Flexible Solution for Real Estate Transactions to learn how GLO can help ensure a seamless seller financing experience.

We provide in-depth consultations to help you understand the suitability of wrap-around mortgages, installment land contracts, or lease-to-purchase agreements for your specific situation, outlining the benefits and potential risks of each. Our team prepares and reviews all necessary legal documents, including promissory notes, deeds of trust, and escrow instructions, ensuring they are legally sound and tailored to your unique agreement. GLO advises on critical clauses, such as "due-on-sale" provisions in underlying mortgages, and helps to define clear remedies for default, mitigating the uncertainties inherent in these alternative financing structures. We also assist in negotiating terms, addressing potential pitfalls, and ensuring compliance with all relevant Colorado real estate laws. By partnering with GLO, you gain the peace of mind that comes from knowing your home, your most significant asset, is being handled with the utmost legal care, allowing you to confidently navigate the intricacies of seller financing.

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GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific signed fee agreements. GLO does not guarantee any results