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When you're selling real estate with owner financing, there's one critically important question you should be asking yourself:
As the Seller, what type of loan instrument should I be using?
It's an important question because the answer can vary greatly from state to state.
In several states around the U.S. – the Land Contract (aka – Contract for Deed) is the most commonly used instrument for seller-financed deals because, based on the laws of those states, this instrument allows for the cleanest, easiest foreclosure process if the borrower defaults on their payments to the seller. It also keeps the property titled in the seller's name until the loan is paid off.
In several other states around the U.S. – the Deed of Trust (aka – Trust Deed) is more commonly used for seller-financed real estate transactions because, based on the laws of those states, this instrument is FAR easier to foreclose with. Some states have laws allowing the Seller/Lender to do a non-judicial foreclosure and avoid an expensive, time-consuming court procedure (but this is only available if the Lender uses a Deed of Trust with the proper “Power of Sale” language included).
REtipster does not provide legal advice. The information in this article can be impacted by many unique variables. Always consult with a qualified legal professional before taking action.
How a Deed of Trust Works
The Deed of Trust is a loan instrument that isn't recognized in all 50 states. Still, in most areas where it is recognized, it can make the foreclosure process much easier for the seller if the borrower ever defaults on the loan.
When closing with a Deed of Trust, there are three key documents (among others) that work together to transfer the property and provide security for the Lender. Those documents are:
- The Deed
- The Deed of Trust
- The Promissory Note
To understand the context of where these three items fit amidst ALL of the closing documentation, let's dive into the standard closing documents that I follow when I'm closing a Deed of Trust in-house.
Disclaimer: 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 affect these standard documents listed below. Even though these are the exact steps & documentation that I use in my closings – don't assume that this information fully applies to your situation. Before you act on anything described below, consult with an attorney or legal professional in your area to confirm you're following the right steps and procedure.
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 deals unless you're willing to go slow and get the help you need to ensure you're completing each step appropriately, following the laws and regulations of your state.
The Closing Checklist
When I'm closing a Deed of Trust in-house, these are the steps I go through. Let's get into it!
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 to close the deal, it’s usually a good starting point because it helps clear the Buyer's and Seller's intentions by putting all the terms 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, both parties need to be completely agree about their respective commitments to the deal.
As I mentioned above, when selling a property with a Deed of Trust, 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 can use a MUCH simpler contract to get the job done.
My template is just three pages long, and it looks something like this:
As you can see, it's pretty simple and I like it this way because it doesn't intimidate the other party. It's straightforward, to the point, and it's easy for people to accept and move forward.
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 Promissory Note and Deed of Trust (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 a helpful story about who your borrower is, which is good information to know if you want to understand who you’re working with.
Another way to handle this is to use an e-signature platform like PandaDoc, where the borrower can answer these questions AND e-sign it simultaneously.
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. Promissory Note
The Promissory Note is an important loan document that should be executed between the Buyer and Seller at the time of closing.
The Note is a legal agreement between the Borrower (Buyer) and Lender (Seller) that lays out the terms of the loan. It should include all the basic details, such as:
- Loan Amount
- Date of the Loan (including the first payment date)
- Interest Rate
- Payment Amount
- Number & Frequency of Payments
- How the Loan will be Paid (e.g. – principal & interest, installments of interest-only with one lump sum on a specific date, or due on demand)
- How the Note will be secured (e.g. – by a Deed of Trust)
- Whether the Lender can sell or transfer the note to another party
Oftentimes, it makes sense to include an amortization schedule with the note, just to make it abundantly clear when each payment is due, the amount of each payment and what portions of each payment will be applied to principal vs. interest.
Your Promissory Note should be signed by the Borrower, but it does not need to be recorded by the county. It simply acts as a legal document that can be used in court if you ever need to demand what you are owed from a defaulting borrower.
4. Deed of Trust (a.k.a. – Trust Deed)
The Deed of Trust (also known as a “Trust Deed”) is a document that gets recorded along with the Deed in the county's records, and it acts as the “security instrument” for the lender's collateral.
In a seller financing scenario, a Deed of Trust technically involves three parties:
- The Buyer (Borrower)
- The Seller (Lender)
- The Trustee
This document contains much of the same information listed in the Promissory Note, with some additional language (which usually varies by state) that describes the Borrower's, Lender's and the Trustee's options on how they can proceed in the event of default.
In most of the states where the Deed of Trust is recognized, this type of security instrument will allow the Trustee (which is usually designated as a title company, attorney or loan servicing company) to handle the entire foreclosure process out of court – which is known as non-judicial foreclosure.
A non-judicial foreclosure usually isn't free (the lender will have to pay the Trustee to handle this process), but it can still save a great deal of time and hassle by avoiding an even longer and more expensive court procedure, as would be required with any other type of loan instrument.
The “Power of Sale” Provision
In order for the Lender to take advantage of the non-judicial foreclosure (in the states where this option is available), the Deed of Trust needs to include the proper “Power of Sale” language within the document.
The non-judicial foreclosure process typically involves a series of notifications to the borrower, followed by a public auction – where the Trustee has the authority to either sell the property to a third party and recoup the cash, or in some cases, the Lender may be able to buy the property back from the Trustee.
In order to prepare the Deed of Trust form, you'll have to get the right template and complete it with all the pertinent details.
Important: Since the Deed of Trust works in conjunction with the Promissory Note, there should be no disagreements or variations in the terms listed in both documents (e.g. – same loan amount, same interest rate, same payment terms, etc.). Failure to keep this information consistent between both documents could cause future problems for the Lender.
Preparing the Deed of Trust
In many cases, an attorney is hired to tailor this document specifically for each transaction. In the cases where a title company prepares the Promissory Note and Deed of Trust, they are usually working from a state-specific, boilerplate template.
If you're looking for a more general template to work with, you could contact a local real estate agent to see if they have any state-specific templates available, or you could use a service like Rocket Lawyer, which makes the process extremely easy. This video explains how it works:
Once you've got the correct form and you've verified that it meets all the requirements of your state (and includes the proper “Power of Sale” provisions), be sure to take a few minutes and read it through very carefully. Every state has differences in how this form is written, and as a general rule, it's important to understand exactly what you and the other party are agreeing to.
Note: When the transaction is closed, the Deed of Trust should be recorded by the county (along with the Deed, see below.
In a Deed of Trust transaction – the seller transfers the property to the buyer at the time of closing by completing and recording the deed.
At the same time, the Deed of Trust (item #4, above) should also be completed and recorded, which will effectively create a security interest in the property for the Lender, by designating the Trustee as the person/entity who has the authority to exercise the Lender's foreclosure rights when appropriate.
There are several different types of deeds that can be used in conjunction with a Deed of Trust. The standard deed types can vary by state, but let’s cover a few of the more commonly known ones below (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 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 no warranty of any kind with regard to the property’s title. In essence, the seller isn’t even claiming to have any ownership in the first place. By signing this document, the seller is saying,
“Whatever interest I may have in this property (if anything), I am transferring it to the buyer.”
If a buyer is willing to accept this, they should really be doing their homework to ensure the property has a clear chain of title.
Because of how open-ended this type of deed is, it has a tendency to create problems in the chain of title for future owners since it lacks any guarantees or clear statements about who owns the property. If the seller’s goal is to simply not guarantee the title from the beginning of time, another alternative is to issue a Special Warranty Deed (more on that below).
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 US Legal (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.
6. 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 completed as required by your state.
7. 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.
Note: If you want a copy of my closing statement template and a video tutorial on how to fill it out correctly, – you can get access to it at the bottom of this blog post.
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 notification form that consists of one page, and it does a few key things:
- 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.
If you're not sure whether your state requires this form, this video explains how you can figure it out…
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.
If you’re using a loan servicing company or working with a CPA to prepare your annual tax return, at least 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 transaction is closed, the documentation is complete and all the appropriate forms have been recorded by the county, be sure to keep copies of ALL fully executed documents in your files (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 figuring out a similar system and back up your files.
Post-Payoff: Deed of Reconveyance
One thing to keep in mind is that once the deal is closed – the documentation on the seller's behalf isn't over just yet.
When the borrower has made their final payment on the loan, the Lender will need to notify the Trustee to prepare and submit a “Deed of Reconveyance” (aka – “Reconveyance of Deed of Trust” or “Release of Lien”) to the county for recording. This document confirms that the borrower has fully repaid the loan and it eliminates the Deed of Trust as a lien in the property's chain of title.
Just like every document in this process, there isn't a one-size-fits-all template for this particular form – but if you're looking for an example to reference, check out this one from Rocket Lawyer. Again, some states have specifics that need to be addressed in accordance with the wording of the original Deed of Trust, so be sure to consult with a legal professional in the state where you're working to verify that your template is worded correctly.
Over the years, I’ve played with a lot of different versions of the above-mentioned documents. Some of these forms (i.e. – like the Deed, the Promissory Note, or the Deed of Trust) may need to be tailored slightly 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 US Legal 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 Deed of Trust works. Armed with the right templates, the right knowledge of how your state's laws work 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 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 Land Investing Masterclass – so if that sounds like it might be helpful, be sure to check it out!
When Should You NOT Close Your Own Deals?
Now… do you NEED to handle all of these steps yourself? Absolutely not.
Here's the decision matrix I use to decide on the direction of each deal.
- I don't offer owner financing on properties that sell for less than $20K.
- If a property sells for $20K or more, I'll outsource the closing to a title company or attorney.
- If it's my first seller-financed transaction in that state, I'll find a foreclosure/creditors rights attorney to compile the correct loan documentation and help me understand what the foreclosure process looks like.
- Whatever costs are needed to close the deal, I have the borrower pay a large enough closing fee to cover everything.
This way, I only use seller financing on deals that are worth the trouble, and any additional costs are paid by the borrower, so it doesn't come off my bottom line.
Even if you never close your seller-financed deals in-house, it's still beneficial to understand what's going on in each closing, so you can comprehend what your closing attorney and title company are doing and make sense of “how the sausage is made.”
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 each step in the process. Knowing these steps has been a huge advantage, whether I need to handle it myself or hold my closing agents accountable.
If you ever decide to close your deals in-house, remember that it's okay to go slow. Take your time and make sure 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.