What is Seller Financing?

When a seller allows a buyer to make payments over time for the purchase of property, it is known as owner financing or seller financing. This private financing by the seller can take the place of a bank loan or be in addition to a conventional mortgage.

The payment amount, interest rate, and other terms are agreed upon between the buyer and seller. The amount financed by the seller will depend upon the buyer’s down payment and whether there are any bank loans.

Here’s an example of how it works.

An owner advertises his or her house for sale, either on her own or through an agent.

A buyer makes an offer, and they agree upon a sales price of $175,000 with a 10 percent down payment of $17,500.

Rather than requiring the buyer to obtain a bank loan, the seller carries back the balance of $157,500 in the form of a note and mortgage. It could also be a note and deed of trust or a real estate contract, depending on the customary documents for that state. A title company or real estate attorney is often used for the closing.

The note spells out the terms of repayment. In this case they agree upon 8.5 percent interest at $1,211.04 per month based on a 360-month amortization. The seller doesn’t really want to wait a full 30 years for payments, so the note requires payment in full, known as a balloon payment, within seven years.

Because the buyer is making payments to the seller rather than an institutional lender, the legal arrangement is called a private mortgage, seller carry-back, installment sale, or owner financing.

The seller has the same mortgage rights as a bank, so if the buyer does not make payments, the seller can foreclose and take the property back.

When the seller prefers cash today rather than payments over time, the rights to future payments can be sold or assigned to a note investor on the secondary market.

Here are some common repairs to consider before negotiating a sale:

 

  • Fogged windows — Fogged windows are a result of moisture buildup in between panes where the seal has failed. Though functional, foggy windows look dirty. Consider repairing or replacing fogged panes as needed.
  • Leaking jet tubs/faucets/showers — Check jet tub systems, faucets and shower fixtures for leaks prior to listing your home to ensure no plumbing issues surprise you during a home inspection.
  • Rotting wood on exterior trim — Splitting or rotting boards on the exterior of your home can make it look shabby. Consider replacing, caulking and painting them to refresh your home’s appearance.
  • Split or missing roof shingles — Buyers tend to shy away from roofs that need repairing. Consider the level of repair, cost, market conditions, comparable sales and how quickly you want to sell before making a repair decision.
  • Loose hand or deck rails — Buyers can pay a lot of attention to hand rails, so bypassing this safety issue may result in a lost offer. Fixing wobbly rails ensures safety and satisfies a sharp-eyed buyer.
  • HVAC units — HVAC units are a big concern if they’re not working, as they’re expensive to replace. Consider having the unit cleaned and serviced. At a minimum, change the air filter and make sure the unit is operating properly.
  • Light bulbs — Home inspectors have written “see licensed electrician” in their reports solely due to bulbs missing or not working. To avoid the impression that there may be a major electrical issue with your home, simply change your burned-out light bulbs. Also, be sure to use bulbs with the correct wattage.
  • Dirty spaces — Even if repairing, replacing or repainting is too costly, make sure you clean walls, floors, carpets, bathtubs, showers, kitchens and driveways to make your home look clean and ready to sell.

Need to make sure your home is ready to sell? However, if you don’t want to do anything mentioned above, we have a solution.

Just give us a call (951) 901-8153.

Q: Am I Personally Liable to Pay on My Defaulted Mortgage?

A: The primary source of a mortgage lender’s recovery in the event the property owner defaults is the real

estate held as collateral, not the owner personally. To satisfy an unpaid mortgage debt, the lender is forced

to first sell the secured property by completing one of two types of foreclosure sales to satisfy the amounts owed:

  • a judicial foreclosure; or
  • a nonjudicial foreclosure.

Occasionally, the fair market value (FMV) of the property is insufficient to satisfy the debt through bidding at the

foreclosure sale. If the high bid is less than the debt owed on the mortgage, the lender suffers a loss, called a deficiency.

However, to collect on a deficiency, the mortgage lender is very limited in California. The most common type of foreclosure action in California is nonjudicial. When a lender completes a nonjudicial foreclosure sale though a trustee’s sale, they are barred from recovering their loss on the mortgage, except for intentional waste to the secured property.

Further, California has established anti-deficiency laws which bar lenders from collecting losses due to any type

of foreclosure sale on a nonrecourse debt, also called purchase-money debt.

Nonrecourse debt includes:

  • purchase-assist financing secured by a one-to-four unit residential property occupied by the buyer;
  • carryback seller financing evidencing the installment sale of any type of property which becomes the sole security for the debt; and
  • refinanced purchase-money mortgages, to the extent the funding is applied to discharge the purchase-money mortgage (including fees and costs associated with the refinance transaction). Every other type of mortgage is a recourse debt. The homeowner with a recourse mortgage is personally responsible for the payment of the debt. Recourse debt includes:
  • business-purpose mortgages secured by any type of property; and
  • all mortgages secured by a:
  • second home;
  • property containing five or more residential units;
  • commercial property; and
  • one-to-four unit, owner-occupied residence when the mortgage is a home equity line of credit

(HELOC) to the extent funds were advanced for purposes other than the purchase, construction or remodel of the property.

When a recourse second mortgage is wiped out by the foreclosure sale of a first mortgage holder, the wiped-out

lender may pursue a money judgement against the property owner to recover the debt. The exception: mortgages insured by the Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) are subject to government recovery of these unpaid mortgage debts and have recourse against the homeowner. However, the FHA and VA rarely pursue deficiency judgments, though they have legal authority to do so.

I am an investor and, although I hold a real estate sales associate license, I am acting as an investor. However, if you would be best served through the traditional listing process, I will be happy to assist you there, as well.

Ed Wojtowicz                BRE #: 01754533                       (951) 901-8153

What happens when I’m late on a mortgage payment?

A: The late charge provision in a mortgage calls
for an additional charge if your payment is not
received by your lender when due or within a grace
period.
The minimum grace period before a mortgage
encumbering a one-to-four unit, owner-occupied
residential property is delinquent is ten days after the
due date without receipt of the payment — even if no
agreed-to or a shorter grace period is stated.
If you fail to pay a late charge when demanded, it is not
a material breach of your mortgage. As a non-material
breach, the failure to pay a late charge alone is not
grounds for your lender to initiate foreclosure.
To be enforceable, the late charge may not be punitive
in amount, as in an effort to coerce timely payment.
The amount needs to be reasonably related to money
losses incurred by your lender due to the delinquency.
The late charge on any mortgage secured by an
owner-occupied single family residence (SFR) is
limited to the greater of:
• 6% of the delinquent principal and interest
installment; or
• $5.
Lenders give notice and make a demand for the late
charge by providing the borrower either:
• a billing statement or notice sent prior to each
payment’s due date stating the late charge
amount and the date on which it will be incurred;
or
• a written statement or notice of the late charge
amount sent concurrent with or within ten days
of mailing a notice to cure a delinquency.
For mortgages secured by a one-to-four unit principal
residence, the lender is not permitted to assess
more than one late charge per delinquent monthly
installment, no matter how many months the payment
remains delinquent. Additionally, the late charge may
only be charged on principal and interest payments,
not on impound amounts or unpaid late charges

Ed Wojtowicz, Sales Associate

CalBRE Lic# 01754533
Contact: 949-500-7869

Equity Plus Realty

Richard Cerda, Broker

CalBRE Lic# 00464898

Contact: (951) 323-6289

You Can Avoid Probate

How to Avoid Probate

Wikipedia: 4 Ways to Avoid Probate

Four Methods:Naming a Transfer on Death BeneficiaryCreating a Revocable Living TrustSharing OwnershipUnderstanding ProbateCommunity Q&A

Probate is the court-supervised process of settling a deceased person’s personal and financial affairs. During probate, an appointed Personal Representative will collect the decedent’s assets, pay any bills, and distribute property to heirs. Depending upon your situation, it may make more sense to have the property pass directly to heirs or beneficiaries, bypassing the probate process. You should consult or hire a trusts and estates attorney to ensure that you do not make any costly mistakes in your attempt to avoid probate.

Method 1

Naming a Transfer on Death Beneficiary

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    Prepare to name a beneficiary upon death. Property that lists a transfer on death beneficiary (TOD) or a pay on death beneficiary (POD) passes directly to the named beneficiary, avoiding probate.

    • Under a POD or TOD arrangement, the property is automatically passed to the beneficiary upon the death of the original owner.
    • This is unlike a will. With a will, property ownership does not change until the probate process is completed and the executor of the estate distributes the property to beneficiaries.
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    Understand the difference between TOD and POD. The two terms are very similar, but differ in the type of account each applies to. Although they are essentially the same, they are used in different circumstances.[1]

    • TOD applies to property that you own. That property (such as real estate or a car) will be transferred at your death to the named beneficiary who can then do with it what they would like.
    • POD applies to money and bank accounts. Money is still considered “property,” but a bank account in your name will not remain open as such after your death. Therefore, the account is “paid” out after your death to your beneficiary of choice, who can then do what they want with the money. However, the bank account must be closed.
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    Select anyone you would like to be a beneficiary. You may name anyone you choose as a TOD or POD on your financial accounts, vehicle titles, and in some states, your real property. When property passes to a joint owner, TOD, or POD, it passes outside of your estate.

    • Your estate consists of all other property, not jointly owned or listing a TOD or POD.
    • To avoid probate, you must ensure that all of your property passes outside of your estate, directly to a beneficiary or joint owner.
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    Establish a TOD for your vehicle(s) at the Department of Motor Vehicles. Some states will allow you to name a TOD beneficiary for your car. This is beneficial because then the car can be automatically transferred to the new owner instead of sitting unused during the probate process.[2]
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    At the DMV, apply for a certificate of car ownership in “beneficiary form.” (The fee is the same as for a standard certificate.)

    • The new certificate lists the name of the beneficiary (or more than one), who will automatically own the vehicle after your death.
    • The beneficiary you name has no rights as long as you are alive. You are free to sell or give away the car, or name someone else as the beneficiary.
    • You can find out if your state allows TOD beneficiaries for cars here.
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    Name a TOD or POD on your checking and savings accounts. You may do this by visiting the bank and filling out a simple form. Banks will all have slightly different procedures for this, and it may be a good idea to call ahead and ask before you visit in person. If you are naming a joint owner, the person you are naming will need to be present and sign a signature card to be added to the account.[3]

    • A simpler way to manage your bank accounts may be to establish a joint account. With a joint account, if one party dies, the other simply becomes the “owner” of the account and can continue operating the account without any legal formalities.
    • However, keep in mind that naming a joint account owner instead of a POD beneficiary can cause problems.
      • For example, a joint owner can withdraw all your money or cause a lien to be placed on the account if they are sued and a judgment is entered against them.
      • Naming a joint owner can also cause you to be responsible for federal gift taxes. Currently, you may gift up to $13,000 to any one person without owing a federal gift tax.
    • Naming a POD or TOD is the safest way to ensure that your property passes to whom you wish, without giving them any interest in it until after your death.
    • Most states allow a POD beneficiary to take over an account without probate if a will gives you a right to the money and the sum in the account does not exceed a certain amount.
      • In such a case, you need to provide the bank with a copy of the death certificate, the will and a declaration.
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    List a TOD or POD on any annuities, retirement savings, CDs, or other investments that you have. If you use a brokerage firm, they should be able to provide you with the form to list the beneficiary of your choice.[4]

    • Most states have adopted the Uniform Transfer-on-Death Securities Registration Act, which permits TOD designation for investment securities.[5] You can find out if your state has adopted this act here.
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    Discuss naming a TOD on any real property that you own with an attorney. Real property includes both residential and commercial real estate. Some states allow transfer on death deeds and others do not.[6]

    • A transfer on death deed is just like a normal quit claim or warranty deed that transfers property to a new owner. The transfer on death deed, however, names the new owner and the TOD.
    • Check with a local title company or real estate attorney in order to determine if your state allows TOD deeds.
      • If your state does not allow transfer on death deeds, you can always name a joint owner for each piece of real estate that you own.
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    Understand joint ownership of real property. If property is subject to “joint tenancy,” co-owners have equal ownership of a property that passes upon the death of one party to the surviving owner(s) by right of “survivorship.” Another type of joint tenancy is “tenancy in common,” which entitles owners to predetermined shares of the property and allows the portion owned by the deceased to pass in accordance with his will.

    • Survivorship is not automatic, so make sure that your deed specifies that the joint ownership has a right of survivorship.
    • Once one of the owners of the property dies, the surviving owner must provide evidence of the death of the other party (death certificate) and complete a formal declaration setting out the basis for their entitlement.
    • Be sure to consult an attorney about how best to transfer property to heirs or owners with survivorship.
    • You may also want to talk to your attorney or an accountant about tax implications of inheriting or receiving sole ownership of a property.

Method 2

Creating a Revocable Living Trust

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    Establish a Revocable Living Trust. A revocable living trust is a legal agreement that you establish while you are still alive that you can change whenever you want.[7] This trust will become irrevocable upon your death. In the living trust, you name a trustee to handle your assets after your death.[8]

    • The trust remains the sole owner of your property and possessions and remain in charge of all legal decisions surrounding them until your death. You control the property as both the “trustee” and the beneficiary, but you do not “own” it.[9] Should you become mentally incapacitated or upon death, an appointed trustee (not yourself, obviously) will hold legal title to your property and possessions. The trustee will also execute your will, circumventing the probate process.[10]
    • Because the trustee is the “owner” of the trust assets after your death, the property that is subject to the trust does not count as your property for purposes of the probate estate. For this reason, the probate process is avoided altogether. [11]
    • Be aware that creating a living trust will not shield you from federal or state estate tax. In most states, an inheritance valued at or above $5million is subject to an estate tax.
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    Understand an irrevocable living trust. Creating an irrevocable trust means that once you establish it, you have no right or opportunity to change the beneficiaries or disposition of the trust assets. For this reason, most people prefer to establish a revocable trust.[12]

    • Generally, people create irrevocable trusts because if the trust is irrevocable, the creator of the trust no longer “owns” the assets in the trust.
    • This means that creditors are unable to reach the trust assets, and when the creator of the trust dies, there is no estate tax levied on the trust.
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    Name a trustee. Any competent adult whom you trust can be named as trustee, however, you may want to choose someone who has experience handling trust assets or has a financial background.

    • You can choose an attorney or someone who works at your bank as the trustee, or you can choose someone that you personally know well.
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    Consult an attorney. Trusts can be tricky, and it can be advantageous to discuss setting up a trust with an estate lawyer. A living trust is changeable, helps you avoid probate, and helps ensure your privacy, but it isn’t perfect for every situation. There are some disadvantages of establishing a living trust:

    • Maintaining trust books and records can be burdensome and inconvenient. Any future assets need to be tied to the trust to avoid probate of those assets, which can take time and maintenance.
    • An attorney can help with complicated estate tax matters.
    • A living trust can incur many fees. Whereas a standard will can cost you a hundred or so dollars, the average living trust will cost much more; it’s not uncommon for living trusts to cost $2,000-$5,000 for a lawyer to establish.
    • A living trust cannot be established without the help of an attorney, which can increase the cost of establishing the trust.[13]
    • You will have to re-title much of your property to include the trustee. This is not difficult to do with the help of an attorney but is an inconvenience that takes time, effort, and money.

Method 3

Sharing Ownership

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    Practice joint ownership to avoid probate. Probate can be avoided if the property or possessions you own are also owned by another individual, usually a spouse, with a right of survivorship.

    • Take title with someone else so that joint ownership exists. Then, when one of the owners dies, the title simply passes on to the other owner — no probate involved!
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    Decide how you want to share ownership. There are several ways that you can establish joint ownership of property. Note that if you already own property, you will have to file new deeds to change the type of ownership of the property. You will need to determine which is appropriate for your situation and property.[14]

    • Joint tenancy with right of survivorship.[15] In joint tenancy, two or more people own the same real property. Then, when one of the owners dies, ownership of the property transfers to one or more of the sole survivors through the right of survivorship.[16]
    • Tenancy by its entirety. This is exactly like joint tenancy, except only for married couples (and in some states, same-sex couples).[17]
    • Community property with right of survivorship. Community property is any property obtained during a marriage (with a few exceptions such as gifts or inheritances that are kept separate from joint accounts).[18] Married citizens of certain states can invoke community property with the right of survivorship, in which all property is transferred to one spouse upon the death of the other.[19]
      • States without community property laws usually have laws that allow for the surviving spouse to inherit at least one third to one half of the deceased’s property; this prevents someone from disinheriting a spouse upon his or her death.[20]
    • Common Law property. States are not community property states operate under common law rules. In general, this mean that if one spouse’s name is on a deed, he or she can determine the person to whom that property passes. If both spouses’ names are on a deed, the surviving spouse usually assumes full ownership upon the death of the other spouse.[21]
    • Tenancy in common. This is somewhat unusual in most deeds, but this allows someone who is married to pass their portion of ownership in a property to someone other than his or her spouse. For example, if a husband and wife share half ownership of a property with tenancy in common and the husband dies, he can leave his half of the home’s ownership to his adult son instead of having his wife own the house 100%, which happens with joint tenancy.[22]
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    Understand the rights of same-sex couples. If you are part of a same-sex couple and you live in a state where same-sex marriage is not legal, you will not be able to hold property jointly either as tenants by the entirety or as community property. However, all other ways to avoid probate are equally applicable regardless of who you want to give your property to.

    • Typically, if you would like to leave property to your partner but anticipate problems due to your marriage status, you should execute a will.
    • Although probate can take time, it is needed in some situations and same-sex couples should utilize the right to designate exactly who they want their property to go to through a will.

Method 4

Understanding Probate

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    Know what probate is. The probate process is a legal process where a person’s final debts are settled and legal title to property is formally passed from the deceased to his or her beneficiaries and heirs.

    • Some property will bypass probate regardless of what a will specifies. Some specific types of property that will bypass probate automatically includes life insurance payouts, retirement funds, savings bonds, and jointly titled property such as bank accounts and property.
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    Understand the three basic steps to probate. The probate process can be broken down to three basic steps. They are:

    • The collection, inventory, and appraisal of all assets that are subject to probate
      • Depending on the value of the estate, this could take months.
      • Additionally, appraising the decedent’s assets could be costly, depending on the nature of the assets. The probate court will require the valuation to be assigned by a professional appraiser.
    • The payment of all bills, taxes, estate expenses, and creditors from the assets of the decedent
      • Based on the decedent’s debts, creditors may sue the estate and deplete the assets that would otherwise be given to beneficiaries.
    • The transference and distribution of all property of the estate
      • If probate is avoided, this is the only step that takes place.
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    Recognize that avoiding probate is not always the best option. Avoiding probate is not for everyone, especially if your estate will be left to many beneficiaries or if your estate is very high in value.[23]

    • One benefit of probate is that it is handled by the court system, so all decisions and distributions should be legal and fair. The court can also settle any disputes that arise during the probation of the will.[24]
    • Forgetting to provide for some of your property using means of avoiding probate can cause portions of your estate to go through probate while other parts do not; this can lead to confusions and complications.[25]
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    Consider the benefits of avoiding probate. The main benefit of avoiding probate for many people is that other approaches may be faster or less costly than going through probate[26] and they allow for the distribution of property to be private and not recorded on public record.[27] This can be of particular benefit to families with strained relationships between spouses (or new spouses) and children or other blood relatives.[28]

Video

[youtube https://www.youtube.com/watch?v=GggibMAAB9k]

Warnings

  • It is essential that you find out what the legal limitations are to avoiding probate before embarking on any avoidance process.
  • Avoiding probate does not mean that inheritance taxes will not be due. Inheritance taxes are charged by both state and federal governments on money and property received due to inheritance. The estate (or its executor) is responsible for paying estate taxes. If you are managing an estate, you should consult with an accountant or estate attorney to determine if inheritance taxes are due, and learn how to file a return and pay the tax.
  • Avoiding probate is not right for everyone. If you have a large estate or wish to leave an inheritance to someone receiving government benefits, avoiding probate may not be your best option.