Before you sign ...
A bank is a place that will lend you money if you can prove you don’t need it. – Bob Hope
The Agreement for Sale strategy (Seller holds title and mortgage in their name – you control the property) may appear like a dream come true when you are trying to purchase real estate without banks. It may be the right tool for your situation, but it comes with its own set of dangers as well.
Before you sign on the line, make it a rule to ask these two questions, which were born out of situations I’ve recently encountered when the Seller is offering to sell via the Agreement for Sale:
- Would a bank mortgage the property? Just because you do not want bank financing on it at this moment, it is likely you will need it at some point down the road when the Seller’s financing expires. Is there a latent defect that makes this property ineligible for financing? There is a long list of reasons a bank won’t touch a property that may not be easily discerned without professional due diligence; from the economic life of the property to environmental contamination. Talk to your banker about the prospective purchase, and have them point out any concerns they may have with the property.
- Future Encumbrances – do you have a mechanism in place to protect yourself against the Seller encumbering the title in the future? You probably do not want the Seller utilizing the property as security in their other dealings while you are under the assumption you control the property. Bring it up with your lawyer and understand what your risks, and ways to mitigate this are.
If you want to get more familiar with the Agreement for Sale strategy, you may enjoy spending a day learning the ropes with lawyer Barry McGuire here. What are your rules when utilizing the Agreement for Sale? Drop them in the comments.
(Photo credit: jk5854)
Good stuff Jeff!