Expert: liznarr - 10/17/2008

Question
We are going to relocate from West Tennessee to Washington State. The only thing holding us back is the sale of our home. Needless to say, the economy and the housing market are working against us. Is it possible to sell on a seller held contract, even though I have a mortgage through a conventional lender?

Answer
Hi Steve,

Yes, if you find a Purchaser willing to buy your home under this type arrangement, you can sell the way you described.  

This type Contract can be referred to as a Bond for Title, Land Contract, or Installment Contract.  It is, simply put, a sale of your home based on payments made in installments, with the title being transferred to the Purchaser AFTER ALL installment payments have been paid in full.

Under this type of sale, if you have a non-assumable mortgage on the property, you cannot CONVEY the property out of your name without the mortgage being paid off unless your lender were to give you written permission to do so.  

If you were to convey title before any mortgage is paid off, the lender would enforce the escalation clause of the mortgage and call the entire balance due.  In the event you were unable to pay the entire balance, you could lose all you had ever put into the home, in addition to probably being sued by the Purchaser.

You should have an attorney draw up this paperwork for you, as it can get complicated.  You need to address, among other things, who will pay the taxes and insurance and what happens in the event the Purchaser is late and/or misses payment(s).  

Since the property will remain in your name until all installments are paid, you should carry rental insurance on the structure, with the purchaser carrying coverage on their contents.  A Contract could be structured so that the Purchaser pays for both policies.  You would want the Purchaser to provide you with verification each year that the rental insurance portion has been paid each year in advance.

The drawback for a Seller is that, without a sizeable down payment, a Purchaser could move in, do significant damage to your property and then move out, leaving you with expensive corrections/repairs to make.

The drawback for a Purchaser is that if a Seller does not make the mortgage payments, the property could be foreclosed, with the Purchaser losing all payments made and any improvements made to a property.

I suspect that with the tightened credit requirements now, along with  declining value of properties in many areas, we will be seeing more and more of these type Contracts used.  They can be subject to abuse, however, but generally with more risk for a Purchaser than a Seller.

Over and above having an attorney draw up such a Contract (which you could also ask that the Purchaser pay for, or even split the cost), do make sure that you get enough money up front to cover damages should the Purchaser default and move out, voluntarily or involuntarily.

Good luck to you, and feel free to write again if you have additional questions.

Regards,
Elizabeth