A sale just fell through because my client is unable to obtain lender-financing to purchase a home. Does she have any other options?
If your client is lucky enough to locate a property completely owned by the seller (i.e. mortgage-free), then owner financing might be a viable option if the seller is willing to enter into a seller financing contract.
Some of the seller-financing options that come to mind are:
- Lease with an Option to Purchase;
- Bond for Deed contract; or
- Credit sale.
In all of the above transactions, the seller of the property finances the home for the buyer much like a bank would finance property. If the seller of the property is able and willing to finance the property for the buyer, then the question becomes which option is better suited for both buyer and seller.
Many people refer to a “bond for deed contract” as a “lease purchase.” While there are many similarities between the two, there are legal differences as well. (A full explanation between the two might require an entire class!!) So, it is important for agents not to use the two phrases interchangeably. (This is similar to when agents say, “I forwarded the contract to my seller,” when in truth and in fact the only thing that was forwarded was an offer – once the seller accepts the terms of the offer completely, then the two sides have a “contract.”)
The main difference between a bond for deed and a lease purchase is the timing of delivery of title.
Regarding transfer of title to the property in a bond for deed: A contract for deed (aka “installment land contract”) is an agreement wherein the buyer makes installment payments on an arrangement similar to an automobile financing. The seller holds legal title to the property as security for payment, while the buyer has “equitable” title. When the buyer pays the full amount due under the contract, the seller delivers legal title to the buyer.
Under a lease with an option to purchase, legal and equitable title to the property will remain in the name of the seller until such time that the buyer pays the agreed upon price.
With a credit sale, title to the property transfers to the buyer at the time of closing (i.e. very similar to a traditional lender-financed sale).
Another difference between a Bond for Deed and Lease with an Option to Purchase is the buyer’s ability to claim homestead exemption. According to La. R.S. 9:2948, the purchaser in a bond for deed contract may claim homestead exemption.
The next question that usually pops up concerning any of the above owner-financing options is: “what terms and conditions can be put in each of the above?”
Louisiana allows the parties to generally put in a contract whatever the parties want, so long as it is legal and not usurious.
Thus, the parties are free to negotiate and agree upon:
- Length of Contract
- Interest Rate
- Responsibility to maintain insurance
- Late fees
- When foreclosure proceedings may be instituted
Louisiana law does have some specific requirements for Bond for Deed Contracts. So, if the parties are considering a Bond for Deed option, it is highly recommended the parties consult an Attorney.
For any questions regarding this email, please contact me at firstname.lastname@example.org.
H.L. “Rye” Tuten, III, is a Title Attorney/Real Estate Closing Attorney and Owner of Tuten Title & Escrow, LLC. Formerly assigned by RICE Insurance to defend real estate agents throughout Acadiana, much of his more than nine years’ litigation experience is with real estate concerns.