If you are a retired couple or a professional between jobs and need steady monthly income by selling your home and carrying the contract, be certain you know exactly how the deal will be financed and are familiar with the documents involved.
In many states, most transactions are now closed using a note and deed of trust; other states use real estate contracts. Few sellers, and even some agents, truly understand the difference between those documents. But the distinctions are important, and knowing the differences up front could save money and worry later.
Both a real estate contract and a promissory note that is secured by a deed of trust recorded against the title to the property permit the seller to loan money to the buyer. The main difference between real estate contract and a note and deed of trust in most states is the time it takes to remove the borrower and buyer’s interest in the property if the borrower defaults.
The real estate contract, as with any other contract, is subject to different interpretations and runs a greater risk of disputes and litigation. The process of clearing the title can be time consuming and costly, especially if either party challenges the forfeiture. In order to avoid an even more complex procedure, the buyer usually has to be located.
“If you are my buyer, default on your obligation and move to Pago Pago, it would be difficult for me to get the property back under a real estate contract,” said Alan Tonnon, a Bellevue-based real estate attorney and a charter member of the Washington State Real Estate Commission. “It would be easier for me to foreclose under a deed of trust, but states vary in the instruments they use. It could be faster with a real estate contract, but it depends on the situation.”
The deed of trust foreclosure takes about 150-180 days, culminating with a trustee’s sale. The borrower and buyer may cure the debt up until 11 days before the sale.
Under a real estate contract, the seller continues to hold legal title to the property until the buyer completes his obligations (finishes making his payments). In the interim, the buyer gets possession of the property and is said to have equitable title to the property. Even though in most cases the seller delivers to escrow a fully executed statutory warranty deed, the deed is not recorded by the escrow until the debt is paid in full.
During the entire term of the contract, the seller is referred to as the contract vendor subject to the rights of the buyer to complete payment under the contract and to receive the warranty deed. The buyer is referred to as the contract vendee.
With a note and deed of trust, the seller delivers a statutory warranty deed to the buyer at closing. The buyer then owns the property, subject to the seller’s security interest (the amount of money still owed to the seller).
In addition to an easier foreclosure process, another advantage is that there is a greater market for the sale of the investment interest secured by the note and deed of trust. There are several national buyers for notes. (If you are holding a note, you probably have received offers to purchase the note from mass marketers.)
In short, it could usually take longer to obtain clear title under a note and deed of trust, yet the real estate contract can be more cumbersome.
The seller also can incur the cost and delay of the court proceedings when using a real estate contract.
Under the foreclosure proceedings of a deed of trust, the seller gives notice to the buyer by certified mail. If the buyer fails to cure the debt, the seller’s trustee (usually a lawyer) gives notice of the intent to sell the property at a trustee’s sale. If the buyer fails to cure the debt 11 days before the sale, the trustee then sells the property to the highest bidder. Deadlines can vary by state.
The trustee, representing the seller, bids the amount of the debt owed, plus expenses. If the seller is not outbid, the trustee can issue a deed to the seller. The seller then owns the property again and can sell the property free and clear.
If the seller is outbid, the seller gets the money first. If the bidding goes higher than what is owed, if more is bid on a deed of trust foreclosure, the seller only gets what is owed (plus costs) on the deed of trust, with the balance going to the purchaser (or any other lien holders).
It’s always best to be familiar with the instruments you use. And, if your buyer gets behind, ask if there are any travel plans in the works.
Tom Kelly hosts “Real Estate Today” from 11 a.m.-noon Sundays on KTTH (770-AM). Send comments to news@tomkelly.com .
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