Home – Structuring the Transaction
There are many ways a transaction can be structured between a buyer and a seller. Each type of transaction has specific risks and potential problems so be sure to consult with an attorney prior to entering into a contract if you have any questions. Some of the most common ways of transferring real estate are:
Most often the simplest way to buy and sell property is with a cash transaction. In such a transaction, the buyer simply brings the total consideration, which is the purchase price adjusted for any closing costs, prorations or other items to the closing, and the seller receives the amount payable to them, which is the purchase price adjusted for any closing costs, prorations, pay-offs or other items. In conducting cash transactions, Blackfox Title requires the receipt of certified funds, typically electronic wires or cashier’s or certified checks, and pays out the proceeds to the seller either as a check or an electronic wire. Assuming the buyer and seller both attend the closing at the same time, cash transactions can typically be funded at the closing with the seller leaving with any proceeds and the buyer walking away with possession of the property.
Traditional Loan Transactions involve third party lenders such as banks or mortgage companies. While there are numerous types of loan programs offered by lenders, all such transactions share the same basic structure. When a buyer is obtaining a loan, the loan proceeds are delivered to Blackfox Title, either by check or electronic wire, and the buyer brings their portion of the total consideration to the closing. The buyer’s portion is generally composed of the buyer’s down-payment and the difference between the loan amount and the total consideration required to close. All of the documents related to the loan are then signed at closing and forwarded electronically to the lender for review. Once funding is authorized (a process that can range anywhere from several hours to several days depending upon the lender and the specific circumstances of the loan), Blackfox Title will pay the proceeds that are due to the seller by check or electronic wire.
In an Owner Carry/Seller Financing Transaction, the seller of the property takes the place of a traditional lender and instead of receiving the full amount of the proceeds due to the seller under the transaction receives a note or promise to pay from the buyer. Sellers in Owner Carry/Seller Financing transactions often also receive at least some portion of the proceeds in cash paid by the buyer as a down payment. The terms of the note in an Owner Carry/Seller Financing transaction can vary greatly depending on whatever terms are negotiated between the buyer and seller. In addition to the note, a buyer will sign a deed of trust giving the seller the right to foreclose on the property if the buyer defaults under the loan. This gives a seller in an Owner Carry/Seller Financing transaction the same type of security a traditional lender has in an ordinary loan transaction. Texas has enacted several laws that could potentially impact the seller in an Owner Carry/Seller Financing transaction so be sure to consult an attorney prior to finalizing such a sale.
Some types of loans are assumable; the borrower under a loan can sell the property by having another buyer “assume” the existing loan by “stepping into the shoes” of the borrower and taking over the payments. Typically a loan is assumable only with the approval of the lender and the qualification of the new buyer. If an assumption takes place without the approval of the lender, the parties risk having the original lender call the note and demand payment of the entire amount owed pursuant to what is called a “due on sale clause.” A due on sale clause is a common condition in most loan documents and simply states that if the property is transferred without the approval of the lender, the lender has the right to make the entire amount of the loan due and payable. Failure to pay in such a situation can result in a foreclosure. The buyer’s assumption of the existing loan is often secured by a deed of trust to secure assumption, which gives the seller the ability to foreclose, often just before the original lender, if the buyer stops making required payments. Assumptions most typically occur in situations where the seller (the borrower under the original loan) does not have much equity in the property or where the buyer is able to pay the seller cash for whatever equity the seller has in the property.
Wraparound Transactions arise in situations similar to assumptions where a seller has an existing loan and wants to sell the property without paying off the existing loan. The difference is that in a Wraparound Transaction, the buyer signs a note payable to the seller and makes payments under that note and the seller turns around and makes payments to its lender. Because of this, a Wraparound is most typically used in situations where the seller has at least some equity in the property and the buyer is unable to pay cash to compensate the seller for that equity. Because of this, the equity, plus the amount still owed under the original loan, are typically lumped together into a note from the buyer to the seller. Wraparound Transactions involve a deed from the seller to the buyer, a note promising to pay a certain amount to the seller, and a deed of trust to the seller giving them the right to foreclose if the buyer stops making payments. The buyer also receives certain protections in a Wraparound Transaction because the documents expressly give the buyer the right to start making payments to the original lender if the seller stops making such payments.
There are many risks to a Wraparound Transaction. First, although the buyer has the right to start making payments to the original lender in the event the seller stops making such payments, as a practical matter, the buyer may not be aware that the seller has stopped making such payments until it is too late. Additionally, a Wraparound Transaction can also trigger the “due on sale clause” that allows the original lender to declare the entire amount owed under a note due and payable if the property is transferred without the permission of the lender.