This week, I'd like to talk about some of the questions I am asked most frequently by those planning on creating a seller-financed mortgage or trust deed to sell their home.

One of the most common questions is about buyer credit. Home sellers often ask if they should request a copy of the credit report for prospective buyers and many also worry about whether they have the legal right to request credit information. The answer to both questions is a resounding "yes". If you are considering loaning a large sum of money to a stranger, you would be foolish not to obtain their credit information. And, because you are considering loaning them a large sum of money, you have the legal right to request such information. You can further protect your legal rights by asking any prospective buyer to sign a document authorizing you to pull their credit history. In addition, if you are dealing with more than one buyer (i.e. a married couple), you should request the credit information for both partners.

We are commonly asked "Is there a difference between a mortgage and a trust deed?". The answer to that is yes, there is a difference between the two, but quite often, we use the terms interchangeably. There are differences in the way a foreclosure is dealt with and many states do not allow deeds of trust, so mortgages are most commonly used in those states. For our purposes, you can assume that when we use the term mortgage, the same statements apply to a trust deed unless stated differently. We will go into more detail about mortgages vs trust deeds in a future article.

Another commonly asked question is whether or not it is necessary to have the property appraised. And the answer is, it depends. You are under no legal obligation to provide an appraisal of the property. And you may very well be able to attract a qualified buyer and sell your home without one. However, if you ever decide to sell the note you are holding, any investor considering purchase of the note will likely require an appraisal of the property. The problem is that it may become more difficult to get that appraisal (especially if the investor requires a full appraisal of the home) once the sale has been completed and the property is no longer under your control. So, it may be much easier to simply acquire the appraisal before the sale. Of course, having a qualified appraisal also gives you a good basis for pricing your property as well as leverage for negotiating the price of the sale.

One common problem that I've seen several times over the past few years deals with the situation where a home seller is selling the home to someone he/she already knows, often a family member or friend. Often, these types of deals end up with no credit report and no appraisal being performed. And that's fine if the home seller intends to keep the note and collect the payments until the note is completely paid. The problems arise when the note holder (previously the home seller) has an expected need for cash and decides to sell the note to raise the needed cash. Often, these deals go sour because the credit rating is not what was assumed. And the deal sours even further if the appraisal does not support the selling price of the home, resulting in a lower equity value in the property. More than once I've seen friendships and business relationships ruined in this situation as the finger pointing and name calling gets out of hand. I've found it's always best to remember that friendship is friendship and business is business. If you do not feel comfortable asking your friend, relative, or business associate about sensitive issues like credit ratings, you should reconsider loaning the money at all.

I hope this helps some of you who are considering selling your home using owner financing as a payment option. Next week, we will talk a little more in depth about red flags and procedures that you should be aware of before embarking on creating a seller financed loan. Til then, if you have any questions, please feel free to contact First Class Cash Flow Handlers.