This is an easy one. There are none. Zilch, zero, nada! Let me explain.
Sellers may finance property in two different ways.
One is by using an instrument called a Purchase Money Mortgage. This method is very much like a conventional mortgage except that the seller is the “bank.” Title passes to the new owner immediately. Escrow, as a neutral third party, accommodates the sale by making sure title is clean and by arranging title insurance.
The other method is by way of an Agreement of Sale. Buyers get the equitable title while seller continues to hold legal title. There are 2 closings. One at the beginning and one at the end. One common reason to use an agreement of sale because the seller needs to convey a property with an existing mortgage. This involves “wrapping” the mortgage which basically means that the buyer pays the seller and the seller continues to pay their note.
There is no way to ensure the seller will continue to pay their underlying mortgage. If they don’t the lender can still foreclose. While it’s possible to “wrap” the mortgage without lender permission, most title companies will not provide title insurance without it.
Besides an underlying mortgage, I can’t think of a single legitimate reason that a seller would need to use an unrecorded Agreement of Sale but here’s are a few other reasons a seller might do so. These are all issues that would be revealed in a title report if a recorded instrument was used.
- They owe back taxes. These always attach to the property. The taxing authority could seize the property to satisfy the debt especially since they have no knowledge of a sale.
- The same is true for Child Support liens. I once wrote about a seller (girlfriend) who had to pay her boyfriend’s child support lien so that she could sell her property.
- Judgments, (like a default on a credit card or deficiency amount on a repossessed car) can attach to the property. Permit issues such as an unpermitted house could be a reason a seller might want to owner finance but unless there are encumbrances (liens), there is no reason to use other than a Purchase Money Mortgage.
Recording a mortgage is meant to put the public on notice regarding the debt.
This shows up when the escrow company requests a title search. With an unrecorded document, an unscrupulous seller could even resell the property to someone else. They could even take out a new loan on the property at any time.
While some sellers like to “owner finance” to make interest, there is no reason to use any unrecorded instrument. The mortgage meltdown left us with few options for vacant land loans, especially for an out-of-state buyer. Some sellers will accommodate a buyer by being the “bank.” Again, recording the mortgage and note provides critical protections to the buyer.
But what happens when the sellers owe more on the property than it’s worth
Or when their property is otherwise distressed (as in going into foreclosure) or when the property simply will not appraise for the purchase price (seller financed properties are not normally appraised)? These are situations when sellers tend to explore every sales approach.
Ensuring a buyer is protected is just one more great reason to hire a REALTOR® who understands this type financing and can advise about the pitfalls. Bottom line is that buyers should proceed with extreme caution any time a seller suggests an unrecorded anything!