What are the steps involved in an Owner Financed Home Purchase?

Every sale of real estate requires that the original intent of the parties be carefully defined. The negotiation process establishes the price of the sale, the expected condition of the property, and any other considerations important to the parties. The document that sets out this agreement is called the Purchase and Sale Agreement, or Earnest Money Agreement.

In most states, this document is so basic to the process that an escrow closer cannot proceed until all sellers and buyers of the property have signed the "P&S" in agreement. This document, typically made up of a "boilerplate" with addenda, is best executed with the help of a qualified real estate professional. In the event of a later dispute or a document that differs from the Purchase and Sale Agreement, it is generally held that the original intent of the parties is controlling. Any deviation from the P & S during the closing, or later, can be done only with the agreement of every party to the transaction.

Once everyone has agreed on the terms, the purchasers deliver this offer to the seller, along with earnest money to bind the agreement. The sellers must all agree and accept the funds to bind their agreement. The P&S Agreement is delivered to the designated escrow closer, along with the earnest money.

In some states, the seller may be required to hand the purchaser a disclosure of the condition of the property before closing can take place. If so, this should be done early in the process. Quite often a purchaser arranges to have a home inspector look at the property for defects in major elements. Electrical, pest, or roofing inspectors may also be called in.

Prior to the closing the buyer must arrange to carry insurance (homeowners, business) in agreement with the requirements of the documents. The closer will review a binder to see that the seller's interest is insured. The seller will typically be required to provide title insurance at the closing. If a claim should arise later that is ahead of the purchaser's interest in the property, the title insurance company will pay off any claim up to the limit of the sale (the value of the property).

At the closing, the escrow closer brings together the property from the seller in exchange for the purchase price from the buyer. An escrow closer is generally independent of both parties, and has a duty to see that both parties are fulfilled, or the transaction fails. The seller (typically) could choose their attorney to close. In this case, the attorney carries a duty to both parties to execute the Purchase and Sale Agreement, but also carries a specific duty to look out for the interests of his client.

At closing, the property could be encumbered by liens (loans) and, depending on the terms of the sale, the loans may be paid off from the down payment, they may continue in force and receive payments from the seller (just as he receives payments from the buyer), or the buyer may assume those debts to pay as his own, reducing the amount owed to the seller. Both parties should read the loan papers carefully when structuring either type of assumption.

The purchase price is made up of the earnest money agreement (already paid and typically held by the escrow closer), the remaining amount of the buyer's down payment, and the loan documents that represent the rest of the sale price. At this time, the escrow closer inspects the title to the property to ensure it meets the requirements of the Purchase and Sale Agreement, and takes signatures from the buyers and sellers. The closer drafts checks to pay off liens as necessary, determines that insurance is in force, pays taxes as necessary, and prepares lien documents for recording. The parties may all come to a single table to sign and exchange documents (a "New York" closing) or, more typically, the parties come to the closers at different times to perform their separate responsibilities.

As the final element of a closing, the closer will record the sale in county records and disburse funds. Liens are repaid, title is transferred, and loans made of record by an attorney or other professional licensed by the state to perform the work. The sale is dated and consummated.

Finally, the seller and the buyer will use an independent escrow collection agent to collect the payments, disburse the funds, and convey the property on payoff of the balance.