Not a frequent question, but a baffling one that we occasionally receive, despite our decade of experience in real estate as Proxima Investors and our esteemed A+ rating with the Better Business Bureau, concerns the legality of our deals on terms.
In general, deals on terms are entirely legal across all states, provided they comply with applicable rules and regulations at all levels of government.
However, it is important to note that certain jurisdictions may impose specific requirements that must be met. A prime example is Texas, where unique regulations regarding lease-options have been established in response to abuses by unscrupulous real estate investors and professionals. These regulations aim to enhance transparency and protect buyers from exploitation, including mandates for disclosing any underlying debt.
Aside from these specific instances, arrangements such as lease-options, seller financing, and other deals on terms remain legal unless explicitly prohibited, just like any other conventional transaction. In our view, such prohibitions are unlikely to emerge in the near future.
It is essential to understand that despite the varied terminology used for marketing purposes, these deals typically fall within well-defined categories recognized and regulated by law—such as rentals, sales, and options—rendering them completely legal transactions.
The financing aspect present in certain deals on terms, such as seller financing, may be subject to specific regulations similar to those governing institutional lenders. The rules applicable to small lenders and home sellers who finance a purchase in a one-time transaction or for a limited number of properties are quite limited. These regulations are primarily designed to protect end buyers from unscrupulous practices while ensuring that the implementation of such financing methods is not unduly restricted. This approach supports and facilitates homeownership, which is a fundamental component of the American Dream and a significant objective for many individuals across the nation.
It’s a Purchase & Sale agreement where the transaction is:
- partially in cash or and the rest is financed by the Seller or
- financed by the Seller entirely
In this type of transaction the Seller typically receives regular monthly payments (installments) in addition to a possible, initial downpayment that is credited towards the purchase price. There can also be no downpayment, that’s when the whole amount is financed.
It’s similar to a regular bank mortgage loan, and it’s equally secured by the property that acts as collateral and security for the lender. The Seller can be described as “the bank”; despite different rules, generally more favorable than for banks and other large lenders, it holds a very similar position in a Seller Financed deal.
The Seller carries a note for the installments, which can usually be easily sold for cash if the Seller opts to, and a mortgage for security that allows to force the sale of the property in case of breach of contract. The note can be recorded to notify the general public of the existence of a secured loan on the property, to put the lender/seller in a strong position.
Proxima Investors are the financed as Buyers and typically we simultaneously sell on Seller Financing to our end Buyers also. We extend credit in a mirrored deal, or we sell on a variation of lease-option, depending on their Buyer. Depending on the circumstances and what appears to be the overall best type of deal, we may lease, sell conventionally, hold or whatever seems best.
Seller-Financed sales are executory contracts that have a variable duration; we classify them as short-term (5 to 7 years), medium-term (7 to 15 years), and long-term (15 to 30 years or longer). Most Seller-Financed deals that we’re involved in as Proxima Investors, are short-term.
Like many other Deals on Terms, Seller Financing offers several, strong Tax advantages that a Seller can and should evaluate with their Tax Advisor as each Seller has a unique tax position. We strongly recommend a thorough analysis to make the most of the tax benefits that Seller Financing offers to Home Sellers.
Seller Financing is particularly popular in periods of time when interest rates are particularly high, like in the late 1970s and early 1980s, and more recently, 2023/2024, when rate hikes are needed to tame inflation.
In such economies, the amount of interest that needs to be paid is a great incentive for Home Sellers who want to sell fast, easy and cash in the most, and certainly more than in a conventional sale that involves an institutional lender or bank.
Seller Financing is also called in many other ways including Owner Financing, Purchase Money Mortgages, Owner Carry and many similar variations without significant variation in meaning.