Now, I am not an attorney and this is not legal advice but merely my thoughts and opinions on how I do owner financed deals in Oklahoma.
There are many ways to sell or “rent to own” real estate in Oklahoma and if you read my blog “Judicial Foreclosure VS ??? in Oklahoma” I went over the reality that in Oklahoma, when selling on terms to people who will live in the home, we are pretty much going to face a judicial foreclosure if we end up in court to get the property back. So since we are pretty much stuck with that, we can look at other pros and cons of different ways to sell on terms.
Now we do have Lease Options and Lease Purchase techniques that I went over in my blog “Lease Purchase VS Lease Option” but in this blog we will discuss the different ways to actually “sell” the house on terms and the pros and cons.
Now there are a couple of things that apply to any seller financing strategy and one is the amount of down payment. Small down payments are easier to walk away from but if a buyer puts down a really large down payment, they usually wont walk from that. As an investor selling on terms, we don't want to end up in court so its best to avoid court. We can do that by buying the buyer out: paying them to leave once they are in default. Many buyers just walk, or abandon the house once they get behind. Now if they haven't left I usually start with “If you just move out, I won't pursue the back payments you owe” They way they can get a fresh start somewhere else and I can get the house back quickly. If they don't leave with dropping the back payments, the next step is giving them moving money once they are out. Something like $500, $1000, $1500, etc... to move. It depends on how much hey put down and how much its going to cost in court costs, attorney fees, and underlying payments before you get the property back. If its going to cost a few thousand dollars to get the property back in several months, its better to offer them the money if they get out immediately. If you do that , DO NOT PAY THEM UNTIL THEY HAVE MOVED OUT and also have them sign a release so they can't come back and sue you later.
Now lets get to the different ways to sell on terms.
1. Contract for Deed, also referred to as “Installment Land Contract” or just “Land Contract” and another common term is “Agreement for Deed”.
Now a contract for deed is when the seller enters into a purchase contract with the buyer and the buyer makes payments to the seller for the purchase price. The deed to the property stays in the sellers name until the buyer has paid off the debt to the seller. Once the seller is paid in full, the seller will deed the property to the buyer. It is similar to the way banks finance cars. The bank holds the title to the car until the buyer pays the bank back. When the car is paid off the bank will give you the title.
Contract for deeds are a great way for investors to sell property with and usually only a last resort as a way to buy property on.
Because the seller holds the deed to the property until it is paid off, as an investor selling we are in more control. Yes, in Oklahoma we still have to judicially foreclose if the buyers fights back, but in reality, most buyers who default usually move out owing a few months payments instead of trying to get it caught up. Usually they can move into a rental cheaper than catching up their contract for deed. So for the ones that move out or we pay them to move out, we get the property back and the deed is still in our (entity/land trust) name so our title is not clouded up. It is easier to resell to a new buyer. Now that is assuming that the contract for deed is NOT recorded. When we sell with contracts for deed we DON'T want them recorded to cloud our title.
Now when we use that method to buy, we do want it recorded. Now you may be thinking “why would an investor buy that way?” Its not our first choice but in some deals and with some sellers its the only way to make the deal work.
2. Giving the buyer a deed and taking back a mortgage. This is the normal way be buy when we get a bank loan, we get the deed and give the bank a mortgage on the property. We can sell with seller financing and give the buyer a deed and they will give us back a mortgage on the property. This type of transaction is recorded so when selling, we have to “get the house back” if the buyer defaults. Whether you foreclose to get it back or buy the the buyer out, there will be paperwork recorded to get the property back. Since Oklahoma is the only state left that still uses abstracts, then all the paperwork filed to get the property back will have updated on the abstract. That is more money out of the sellers pocket.
So as an investor when selling, I would rather use a contract for deed instead of a deed and mortgage because of the title issues and abstract in Oklahoma. Now with a sophisticated buyer, usually on higher priced homes, you may have to use this method. A big down payment will make this method worth doing. Now in some states like Texas and California it is WORSE to use a contract for deed because of state laws but this blog is for the pros and cons in Oklahoma.
Now as an investor buying, I would prefer the get a deed and give a mortgage method to buy compared to a contract for deed.
One other thing to mention on mortgages, is that there are 2 types of mortgages in Oklahoma. A regular mortgage and a mortgage with a power of sale. A regular mortgage must be foreclosed by filing a suit in court which is a judicial foreclosure. A mortgage with a power of sale is foreclosed by holding a auction to sell the property WITHOUT going to court first. Now other states use a “deed of trust” or a “trust deed” instead of a mortgage in order to avoid going to court to have an auction to get the property back. Now Oklahoma state laws says that a deed of trust and any other instrument shall be considered a mortgage so they don't fall under the Oklahoma Power of Sale Mortgage Foreclosure Act. If you want the power to sell to avoid court you need to use a mortgage with a power of sale and follow all the steps in the Oklahoma Power of Sale Mortgage Foreclosure Act.
Now if you do use the deed and mortgage route to sell a property on terms, then as an investor you want to have the power of sale and avoid court. Now when you buy, you don't want to give the seller the power to sell so you would want to buy on a regular mortgage.
Now in my blog “Judicial Foreclosure VS ??? in Oklahoma” I went over that fact that if a buyer homesteads a property and requests a judicial foreclosure then you still have to go through a judicial foreclosure even if you have a power of sale mortgage. But there is always the chance they don't homestead the property or request the judicial foreclosure so it is better for an investor, when selling and taking back a mortgage to get a mortgage with a power to sell.
One more thing to note on power of sale mortgage in Oklahoma, the buyer can only request a judicial foreclosure if they homestead the property so when selling to investors the power of sale will hold up because it is not our primary residence and we can't homestead it.
So to sum it up, when selling with terms in Oklahoma I prefer to use the following techniques in the following order based on the buyer and amount of down payment I get.
- Lease Option
- Lease Purchase
- Contract for Deed
- Mortgage with Power of Sale
Now when I am buying I want to buy in the reverse order.
Because every deal and every seller or buyer is different, you need to be aware of all the options and use the best one for that particular deal.