After working in commercial real estate banking for nearly a decade (while running a part-time real estate investing business on the side), I've closed hundreds of real estate transactions over the course of my career.
Whenever the word “financing” comes into play, there always seems to be an endless pile of paperwork and legal hoops to jump through. Everyone wants to protect themselves from liability, etc. – and while much of this documentation is good practice, it has the unfortunate side-effect of making the process seem way more confusing than it needs to be.
After facilitating many of these closings myself, I started to realize something… when you peel back all the complex legal jargon and binders of paperwork, the standard closing process for a seller financed deal almost always follows the same basic steps, and when you understand what those steps are and why they're important, everything starts to make a lot more sense.
Especially when a transaction involves a simpler type of property (like vacant land, for instance), with a creditworthy buyer who agrees to some basic terms – there are many cases where it's completely feasible for the seller to handle the entire closing process on their own.
This is how I've handled the vast majority of properties I've sold with seller financing, and when I got the hang of how all the pieces fit together (i.e. – I understood the laws, statutes, and documentation in the state where my properties were located), I was pleasantly surprised at how much I could do on my own.
Closing your own deals in-house can have SEVERAL advantages. For example:
- You can eliminate some of the excessive, unnecessary paperwork.
- You can move through the process much faster than most third-party closing agents.
- You can communicate more efficiently and effectively with all parties in the transaction.
- You can explain each step in the transaction and usher others through the process.
- You can control the flow of documents, payments, communication and much more.
Seller financing is a MASSIVE opportunity – and many, many people overlook it. To most property owners, the idea of seller financing is a confusing and intimidating topic. It's not something the average person deals with every day, so they turn a blind eye to the countless benefits that seller financing has to offer and in turn, they leave a lot on the table.
The Land Contract
In many states around the country, one of the most common loan instruments used in seller-financed real estate transactions is called a Land Contract (in some areas, it's also known as a “Contract for Deed,” “Articles of Agreement for Deed,” “Land Installment Contract”, “Bond for Title” or “Installment Sale Agreement”).
If YOU want to get a firmer grasp on how the documentation and closing process works for a Land Contract (i.e. – what paperwork is involved, what the documents mean and why they matter), follow along below and I'll show you the exact steps I go through when I sell my vacant land properties with this type of loan instrument.
Disclaimer: Before we go any further, please be aware that I am not an attorney and the information in this article should not be interpreted as “legal advice”. Every state has different laws and every real estate transaction has unique variables that can alter the steps listed below. Even though this is the exact documentation and process I follow when closing deals myself – don’t assume that these same steps will apply in the area(s) where you’re working. Before you act on anything described below, be sure to consult with an experienced attorney in your area to confirm that these are the correct procedures to follow.
Closing a seller financed real estate deal isn't appropriate for all people and situations. The process DOES require some significant attention to detail and organizational skills. Some people are very good at staying organized and keeping track of these details, and others aren't. Don't try to close your own deals unless you're willing to go slow and get the help you need to ensure you're completing each step appropriately in accordance with the laws and regulations of your state.
The Closing Checklist
When I'm closing a Land Contract in-house, these are the basic steps I go through.
1. Purchase Agreement
As with any real estate deal, it all starts with getting a Purchase Agreement signed between both parties.
While you don't necessarily NEED to get this document signed in order to close a Land Contract, it's usually a good starting point, because it helps make the intentions of both the Buyer and the Seller very clear by putting all the pertinent details in writing.
With a seller financed deal, the purchase agreement can be a pretty important document – because it establishes all the terms, conditions, and details of the financing arrangement. For example:
- The Sale Price
- Interest Rate
- Term (Duration) of the Loan
- Closing Fees
- Servicing Fees
- Late Payment Fees
- Prepayment Penalties (if any)
- Escrow Arrangements (if any)
- Earnest Deposit (if any)
- Inspection Period
- Closing Deadline
Unlike a cash transaction (where the buyer and seller go their separate ways after closing), a seller financed real estate deal creates an ongoing relationship between both parties. When the deal is closed, the buyer and seller will effectively become the “borrower” and “lender” – and they will continue to deal with each other for the remainder of the term of the loan. As such, it's important for both parties to be in total agreement about their respective commitments to the deal.
As I mentioned above, when I'm selling a property with a Land Contract, I'm working with raw land. Since this type of property is remarkably uncomplicated (with no tenants to deal with, no improvements to inspect, no utility bills to worry about, etc.), my purchase agreement template doesn't have to be long and confusing. The terms I offer my buyers are very similar from one deal to the next and because of this – I'm able to use a MUCH simpler contract that to get the job done.
My template is three pages long, and it looks something like this:
Filling out all of these details at the outset will take a few minutes – but once it's finished and both parties have signed it, all the subsequent steps become MUCH easier, because this agreement spells out all the details you'll need to insert into the Land Contract (Step 3, below).
2. ID Statement
A personal identity statement is another simple form that isn't necessarily required – but it can be very helpful as you’re preparing the documents to close a seller financed real estate transaction.
As you can see below, this is a 1-page document that asks for the following information from your buyer/borrower:
- First & Last Name
- Mailing Address
- Phone Number(s)
- Driver's License or Passport Number
- Social Security Number
- Date of Birth
- Occupation & Employer
- Copy of Driver's License or Passport
Here's what mine looks like:
This form accomplishes a couple of things:
- It helps in verifying the FULL legal name of the borrower (which is important to make sure the buyer's information is correct when preparing the loan documents).
- If the proper language is included, this form authorizes the seller/lender to pull a personal credit report on the buyer/borrower if needed.
Many title companies and closing attorneys will ask for all the same information when handling the closing. This document will also tell you a very brief, but helpful story about who your borrower is, which is good information to know if you want to understand who you’re working with.
Note: Depending on a number of factors, if the lender collects Nonpublic Personal Information from the borrower, it may trigger some requirements for the lender to provide certain notices to the borrower as required by Regulation P. Check out this blog post for more information on the subject.
3. Land Contract (aka – Contract for Deed)
While there are a number of different “instruments” that can be used to close a seller financed transaction, the Land Contract (sometimes known as a “contract for deed,” “articles of agreement for deed,” “land installment contract”, “bond for title” or “installment sale agreement”) is what I use in most of the states where I work.
A land contract isn't necessarily the right document to use in every state around the country (because some states have laws and statutes that make it a difficult type of document to work with in the event of foreclosure), but in many areas, it's an ideal fit for a seller-financed real estate transaction. In the states where it is most commonly used, there are some variations on the specifics of what this document says, but it generally accomplishes the same purpose.
To get a state-specific template for the area where your property is located, you can find several Land Contract (aka – Contract for Deed) templates on a site like RocketLawyer or USLegal (aff links).Here's one way to create your “Contract for Deed” (aka – Land Contract) document with RocketLawyer:
How Does It Work?
With a Land Contract, the seller holds the legal title to the property for the entire term of the loan (i.e. – the deed won’t transfer to the new buyer until after the loan is paid in full). In the meantime, it allows the buyer to take possession and use the property immediately after signing the land contract.
Some people see a land contract as more favorable for the seller because of the way title is held during the term of the loan, but fundamentally speaking, the end result isn't a huge variation from what usually happens in a typical lending/borrowing relationship.
If you’re financing your first deal, I’d recommend that you take a few minutes to read this document very carefully (whatever template you decide to use). Every state has differences in how this form is written, so it is very important that you understand exactly what you and your buyer are agreeing to.
As you read it through, you’ll see that most of the information isn't surprising – but it will help you understand the responsibilities of both parties for the life of the loan.
4. Land Contract Memorandum
Depending on how the Land Contract is worded, most sellers will also prepare a secondary document called the Land Contract Memorandum (aka – Memorandum of Land Contract).
The purpose of a Land Contract Memorandum is to act as a recorded notification to the public that:
- This property currently owned by the seller.
- This property has been sold to the buyer, but is currently on land contract.
This document is signed and notarized by both parties, and then it is recorded at the county Register of Deeds (aka – Recorder's) office.
The Land Contract Memorandum is a simple document, and the purpose is to protect both the buyer and seller. If any third-party ever does a title search on the property before the loan is paid off, they will find this document, and it will help them understand what is going on. For example:
- If the buyer ever tries to sell the property behind the seller's back (before the loan is paid off), their new buyer would most likely do a title search, and this memorandum would inform them that the seller still owns the property and the buyer doesn't have the legal right to sell it yet.
- If the seller ever tries to sell the property to another person behind the buyer's back (before the loan is paid off), this new buyer would most likely do a title search, and this memorandum would inform them that the property has already been sold to someone else and the seller doesn't have the right to sell it a second time unless they go through the proper foreclosure process.
- If any other lender tries to take this property as collateral by placing a lien on the property (for any reason whatsoever), they would do a title search and realize that the seller already has a superior lien on the property and they will most likely need to be paid off before the loan can proceed.
By recording this document at the county office, it will notify all interested parties that:
- The property is currently owned by Person A
- The property it is being sold to Person B
- Person A is financing the sale via a Land Contract
Effectively, this public information should prohibit either party from doing anything dishonest behind the other party's back.
Of course, all of these scenarios are rather improbable – but it’s still a good practice to get this document signed, notarized and recorded, because it keeps everyone honest (and if you don't do it, nobody will have any idea what is actually happening with the property, other than the buyer and seller).
One potential option for a Land Contract Memorandum is to use the Memorandum of Agreement from RocketLawyer (Note: This particular version is very general and would need a few edits to reference the original land contract).
5. Disclosure Statement
The purpose of this form is to ensure that when I'm selling a property, the buyer is 100% responsible for doing their own due diligence, not me.
When I'm buying and selling properties quickly, I don't always have time to research every potential issue under the sun. I make a point of investigating the most common issues that are relevant to me, but knowing that it's possible for the occasional property to have issues I'm simply not aware of, the purpose of this document is to confirm a few things in writing:
- The buyer understands that it's their job to do their homework before they purchase the property. I won't be blamed for their failure to investigate.
- As the seller, I am not assuming any liability or responsibility for issues I was never aware of in the first place.
- The buyer is releasing me of all liability in the transaction (i.e. – they won't come back and try to “get me” at the first sign of trouble).
Don't get me wrong – I've never even come close to getting sued or encountering legal issues with this type of thing, but if I ever did – a Disclosure Statement like this would be very helpful to have in my corner. This is why I've made it a standard order of business to get this document signed when I am selling a property.
It's also worth noting that some states have specific disclosures that are required in every closing scenario, so you'll want to be sure to investigate whether there are any additional forms you should be completing as required by your state.
6. Closing Statement
The purpose of the Closing Statement is to spell out the entire “math equation” behind the transaction. It shows how much of a down payment the borrower is bringing to the table, how much the closing costs will be, how many dollars of loan proceeds are being financed, who is paying for which parts of the transaction, and more.
The first time I filled out this document, I had to go very slow and think it through very carefully. The form is just basic math, but for someone who isn't accustomed to putting these together, completing a closing statement can require a bit of thought (especially if it involves any complicated fees or prorations).
This document has the potential to be a bit confusing, but it's still important that it be completed correctly.
In a land contract transaction – the seller isn't technically required to deliver the deed to the buyer until after the loan is paid in full. However, I've heard many attorneys and loan servicing professionals recommend creating this document at the time of closing and putting it in a safe place (or giving it to an escrow company) until the loan is paid in full.
Why create the deed at the time of closing? Because if anything ever happens to the seller/lender before the loan is paid off (i.e. – if the seller dies in a tragic accident or becomes physically unable to sign legal documents for any reason), the deed will already exist and when the buyer/borrower fulfills their end of the deal, it can easily be delivered to them rather than going through a long, drawn-out and unnecessary court procedure for something that should have been cut & dry if the deed had simply been prepared and executed at the time of closing.
Either way, the deed shouldn't be recorded or given to the buyer until AFTER the loan has been paid in full.
There are several different types of deeds that can be used when transferring real estate (and the types can vary by state). Let's cover a few of the most commonly known ones, and what implications are inherent in each one…
With a Warranty Deed, the seller is giving the buyer their “Warranty” (i.e. – Guarantee/Promise) that the title to the property is free and clear and the buyer will receive all reasonable rights to the property. This type of deed should only be used when the seller knows for a fact that the property's title is clear of any liens and encumbrances.
Most educated buyers will strongly prefer this type of deed (and if a lender gets involved – it will almost always be required).
Most sellers are okay with signing a Warranty Deed because:
- This was the same thing they received when they bought the property.
- They paid for a title insurance policy when they purchased the property, which ensures a clear title and protects them from any issues (should they arise).
If you’re not certain that you have a clear title to the property you're selling, don’t use a Warranty Deed.
Quit Claim Deed
With a Quit Claim Deed, the seller is offering absolutely no warranty of any kind with regard to the property's title. By signing this document, the seller is simply saying,
“Whatever interest I may have in this property (if anything), I am transferring it to the buyer.”
A Quit Claim Deed provides no guarantees or promises about whether the title is clear – so if a buyer is willing to accept this, they should be doing their homework to ensure the property they're buying has a clear chain of title. This type of deed should only be used when the buyer knows for a fact that the property's title is clear of any liens and encumbrances.
Special Warranty Deed
An alternative to the Warranty Deed and the Quit Claim Deed is the Special Warranty Deed. In most cases, this type of deed is used when the seller is willing to guarantee that there were no defects that occurred with the property's title during the time they owned it.
With a Special Warranty Deed, the seller ISN'T necessarily saying the property has a spotless record going back to the beginning of time; only that it accrued no defects during their period of ownership (there's a big difference – and a Special Warranty Deed can help you spell this out).
If you're looking for an alternative source to get some blank deed templates, you can also check out USLegal (it's not quite as user-friendly as RocketLawyer, but it also doesn't require a monthly subscription).
Note: In my experience, most buyers have no idea what the difference is between these deeds and what implications come with each – but as an educated investor, this is a distinction that you definitely need to be aware of.
8. Supporting Documentation
Many states require some additional “supporting documentation” as a way of notifying the local municipality (i.e. – City or Township) about the transaction that just took place.
The county should be fully aware of this change in ownership because they recorded your deed, but in many cases – the city or township administration is in a completely separate office and they don't share the same systems with the county. As such, they need to be notified separately about the property's change in ownership (and if they aren't made aware of the change, they'll continue sending the property tax bills to the old owner).
In most cases, this is a simple, one-page form that serves a few key purposes:
- Lets the city/township know that the property has been transferred to a new owner.
- Informs the local Assessor of what the sale price was (which assists them in determining what the new assessed value of the property should be).
- Notifies the local Treasurer of who/where they should be sending all future tax bills.
Unfortunately, the exact name of this document varies quite a bit from state to state, so even though it serves the same basic purpose, it can seem a bit more complicated than it really is. For example:
- In Arizona, it's called an “Affidavit of Property Value” and it looks like this.
- In Michigan, it's called a “Property Transfer Affidavit” and it looks like this.
- In Nevada, it's called a “Declaration of Value” and it looks like this.
- In Maine, it's called a “Real Estate Transfer Tax Declaration” and it looks like this.
- In Hawaii, it's called a “Conveyance Tax Certificate” and it looks like this.
See what I mean? Hopefully you get the idea.
9. IRS Form 1099-S
In many (though not all) situations, the person responsible for closing the transaction is required to file Form 1099-S with the IRS.
There are some instances where this form isn’t required, but as a general practice, if you’re planning to facilitate the signing of these closing documents yourself, it’s a good idea to either:
- Plan on filing this form yourself.
- In a written agreement, designate the other party as the responsible person.
Whether you file the form yourself or designate the other party to do so – it’s a fairly straightforward process (but it can take a bit of learning if you’ve never done it before). To learn more about why the 1099-S is important and how you can handle the filing process in your closings, check out this blog post.
10. IRS Form 1098
If you're doing a substantial number of seller financed deals AND servicing them yourself, you should also plan on filing Form 1098 with the IRS for every individual borrower who pays you $600 or more of interest in each fiscal year.
The good news is – if you're using a loan servicing company or working with a CPA to prepare your annual tax return, one of them will most likely handle this for you (but be sure to check with them to verify).
If you plan to handle this requirement yourself, it's a fairly straightforward process (similar to the 1099-S), but can take a bit of education to understand the mechanics of it. Check out this blog post for more details.
Once your Land Contract is closed, the documentation is complete and the appropriate documents have been recorded by the county, be sure to keep copies of ALL fully executed documents (and if you haven't already, make copies of all the documents and send them to the other party for their records as well).
All of the copies I keep in my system are digital (in pdf format) and I keep a pretty clean filing system with individual folders for each borrower. I’d recommend figure out a similar system and back up your files.
Post-Payoff: Record or Deliver the Deed
When the buyer has made their final payment (years from now), it is the seller’s duty to provide the original signed and notarized deed to the buyer and/or get the document recorded, transferring legal title of the property to the buyer. This will confirm that the borrower has paid the loan in full and it will eliminate any associated liens (e.g. – the Land Contract Memorandum) from the property's chain of title.
If the deed was created at the time of closing and held in escrow by a title company for the duration of the land contract – the title/escrow agent should be notified of the payoff, so they can take the final steps to finish this process.
Over the years, I've played with some different versions of the above-mentioned documents. Some of these forms (i.e. – the deed) will usually need to be tailored a bit, depending on what state your property is in, but don’t let this intimidate you.
Admittedly, there are some seller financed transactions (especially ones that involve properties with improvements and other outside financiers) that can be VERY complicated, and they legitimately need the help of a real estate attorney to facilitate the process (and in some states, the involvement of an attorney is required – see this blog post for more information). On the same coin, I’ve found that with many of the simple vacant land transactions I deal with, I'm comfortable using a handful of basic templates to handle these closings in-house, especially when I've taken the time to understand some of the state-specific intricacies that can come into play.
In my first several years of closing my own deals in-house, I used both USlegal as a resource to get the document templates I needed. These days, I use Rocket Lawyer for most of my closings, because I've found that they do the best job of making the process easy.
Whatever you decide to do – realize that it doesn't take a huge investment to understand the basics of how a Land Contract works. Armed with the right templates, the right knowledge of how your state works and a willingness to call an attorney when you have questions, you could literally save yourself thousands of dollars with these online resources (and don't forget, most of these templates can be used over and over again).
Need More Help?
As you’re nearing the end of this guide, all of this information may seem overwhelming.
Don’t panic and don't try to become an expert overnight. I can tell you from experience that my first self-closings felt like a marathon, but it got significantly easier on the second, third and fourth time through the process (and every subsequent time thereafter).
Closing your own real estate deal doesn't have to be difficult – but it is important that you go slow and make sure you're completing each step of the process correctly.
Need More Help?
As you’re nearing the end of this guide, all of this information may seem overwhelming.
Don’t panic and don't try to become an expert overnight. I can tell you from experience that my first self-closings felt like a marathon, but it gets significantly easier on the second, third and fourth time through the process (and every subsequent time thereafter).
Closing your own real estate deal doesn't have to be difficult – but it is important to go slow and make sure you're completing each step of the process correctly.
Unfortunately, I can't provide the exact legal documents and instructions for every one of your closings because I'm not an attorney and there are an endless number of variables that can affect your closing documents.
At the same time, the standard closing process involves a fairly similar set of documentation to get the job done… and if you need help connecting the dots and understanding how the process works, I’d love to help you get there.
When I was closing my first few deals, I had a TON of questions and it would have been very helpful if someone could have simply held my hand and thoroughly explained what each document was all about, what kinds of issues to watch out for and how to navigate through each step of the process.
With this in mind, I spent several months putting together a full-blown course that explains how this process works from start-to-finish. The course is designed specifically for people working in the land investing business, and it comes with dozens of video tutorials and document templates that give an in-depth explanation for each step along the way.
It's all available as part of Module 8 in the REtipster Club – so if that sounds like it might be helpful, be sure to check it out!
Here's what's included:
- Property Sale Checklist for a Land Contract
- Purchase Agreement template (with video overview)
- ID Statement template (with video overview)
- Land Contract template (with video overview)
- Land Contract Memorandum template (with video overview)
- Disclosure Statement template (with video overview)
- Closing Statement template (with video overview)
- Warranty Deed /Quit Claim Deed / Special Warranty Deed samples (with video overviews)
- Supporting Documentation (video overview)
- BONUS 1: How to Coordinate the Signing of Documents
- Closing Remotely by Mail (video overview)
- Closing In-Person (video overview)
- Closing with a Mobile Notary (video overview)
- Closing with a Title Company or Attorney (video overview)
- BONUS 2: How to Handle Payment Collection & Loan Servicing
- BONUS 3: Finalizing the Transaction, Record Keeping & Post-Payoff
- Recording Documents & Keeping Good Records (video overview)
- What to do after the loan is paid off? (video overview)
And as a final, HUGE BONUS – this module comes with all the same tutorials as it relates to a Deed of Trust.You'll get an entire second set of instructions and documents at no additional cost to you.
Now… can you survive without this information? Probably.
Here are some alternatives:
- Avoid doing seller financed deals altogether. This is certainly one way to avoid dealing with the hassle, but if seller financing is truly an ideal fit for the properties you're selling, this means you could be leaving a lot of extra profit and passive income on the table.
- Hire an attorney for every seller financed closing you do. For many transactions, this is the most appropriate way to handle the closing process. It's also the most expensive option – and while some transactions warrant this level of scrutiny and expertise, some deals are fairly straightforward and can be done by anyone who is willing to go slow, pay attention to the details and make sure it's being done right. I actually prefer to outsource my work to a closing professional when I’m selling properties worth $10K or more, but when I'm closing smaller deals with seller financing, I'll use the process outlined above to close it myself.
- Figure out the documentation and processes on your own. With a TON of work, you can wander through your first closing and teach yourself. I was able to do it – and I'm sure you probably can too (and if you choose this route, I hope the information above is helpful to you)!
I'll be the first to admit, there is a lot to know in closing a seller financed deal (especially if you’re brand new to this). Any of the above alternatives are fair game, but if you're starting from scratch, I'd strongly suggest that you find someone who understands the process in your state so they can help shorten your learning curve. The sooner you understand how to start taking control over your own closings, the more flexible and empowered you'll be as a real estate investor.
Take Your Time
When I learned how to close my seller financed deals in-house, one of the best ways I learned was simply by watching. I hired a competent title company to do the paperwork and I just watched, I asked A LOT of questions and I tried to soak up as much knowledge as I could. After seeing it play out enough times, I eventually learned how to do the whole process myself – and handing these closings saved me a ton of money when I was getting started (and it also made the process MUCH easier for my customers).
When you're closing your first deal in-house, remember that it's okay to go slow. Take the time you need to ensure everything is done completely and correctly.
If you’re not ready to do this on your first deal, hire a professional and pass the cost on to your buyer! Even if you have to cough up some of your own profits to pay for this, it’s usually worth it (especially on larger deals). Treat it as a cost of education, ask a lot of questions and learn what you need to know.
Of all the profitable strategies I've seen as a real estate investor, few things have impressed me like the power of seller financing. The way it can take an average deal and turn it into a money-making machine is a pretty amazing phenomenon.
If you’re looking to generate some long-term passive income from real estate, seller financing should be part of your business model. Learn what you need to know, and get started!