Contract Owner: Everything You Need to Know
A contract owner (synonymous to owner financing in real estate) is someone who owns the contract and can use it as a tool to solidify business deals.3 min read
Updated November 23, 2020:
A contract owner is someone who owns the contract and can use it as a tool to solidify business deals. In real estate, the contract owner is also synonymous with owner financing, and it is used to purchase real estate, where the seller or owner offers the property to a buyer through a real estate agent. This allows a buyer to get a home without seeking bank financing.
Moreover, an owner agreement is also known as a land contract, and a land contract entails a variation of seller finance. A lawyer usually drafts the agreements for all parties to sign. The seller is offering the property according to the terms of the agreement, and all parties must agree to the contract to be valid.
The buyer makes payments to the seller instead of a bank. Most real estate agreements adhere to the terms of any other loan, but the terms can be tailored to the need of both parties. Most real estate agreements are noted on the title. The buyer owns the property, but only according to the agreement terms.
A real estate agreement does not have to be recorded to be considered valid. With that, it is in the interest of the buyer to have the agreement recorded on the title. It notifies the public that a property is being sold on contract and will stop the seller from getting potential financing on the property or attempt to transfer or sell the title without buyer permission.
This also allows buyers to get a loan in the future when a lender sees that the buyer can pay according to the terms of the contract. Most sellers require a down payment in the range of 10 to 20 percent of the purchase price, with the remaining balance noted on the contract. Such a scenario is the usual range, but the terms and down payment can be up for negotiation.
Most sellers prefer a short contract term and wish to get the balance paid off soon. Therefore, buyers should take note of any balloon payments requiring an entire balance to be paid at a certain time. A real estate agreement with a five-year balloon payment is the typical scenario. This would mean that the buyer makes the usual payment during the five-year window and the lingering balance would all be due at once in five years from when the contract started. Most buyers would then undergo refinancing to pay off the balance in a more reasonable manner.
If a seller possesses an underlying loan on a property, the real estate agreement would be known as a wrap-around agreement that falls under the terms of the pre-existing loan. In this instance, most lenders would retain a due on sale provision. This would mean that the lender may invoke the due date of the note if the property gets sold and mandates that a notice gets paid off. This would eliminate potential risks and hurdles that are associated with lienholders at a future date.
You should also ensure that all payments are made via a third-party escrow firm, and the company should be instructed to pay the following parties:
- Annual taxes
- Property insurance
This also protects all parties involved and assures buyers that underlying lienholders are paid on time. It also stops the seller from allowing a property to go into foreclosure. The escrow firm should also retain a record of all payments and can calculate the payoff dates when necessary. This would make it much easier for a buyer to display his payment record, and it’s a vital way for a lender to see a buyer’s established payment record.
If insurance and taxes are included in the payment schedules, the escrow firm will protect all parties by ensuring that all obligations are paid accordingly. For existing liens, you should ensure that the total balance of the lien comprises less than the total balance of the agreement. This protects the buyer and seller by minimizing the impact of liens during the contract.
You should also make sure that the agreement contains provisions noting that a seller and buyer agree to not encumber the property during the agreement, protecting all parties. If you include all necessary details that safeguard your interests, this type of arrangement can be a better solution than obtaining financing through a traditional lender or bank.
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