Owner Financing, Cash Flow Notes and Glossary

How can First Class Cash Flow Handlers help me?  First Class Cash Flow Handlers can help you in several ways.  1).  If you are a holding a cash flow note, we will buy that note for cash.  We specialize in helping our clients solve their cash flow needs.  We can provide you with a lump sum of cash in exchange for any cash flow note.  2).  If you are selling your home, we can provide you with products and services which will allow you to sell your home quickly (using owner financing to attract buyers).  You may elect to keep the resulting cash flow note and collect monthly payments, or you may elect to sell the cash flow note and receive a lump sum of cash.  3).  If you are currently holding an owner financed mortgage or trust deed, we can provide you with educational materials to assist you in securing your investment in the mortgage or trust deed.

What is a cash flow note?  A cash flow note is a written document that states a promise to pay, and the terms which include the amount, the interest rate and the length of time.  A cash flow note may be a mortgage, a trust deed, a deed of trust, a business note, a court award (such as a structured settlement), lottery winnings, annuities, etc.

What is owner financing?  Owner financing occurs when the seller of a property takes the place of a bank or mortgage lender and finances the buyer directly.  This results in an owner-financed mortgage or trust deed being created.  (These notes are also sometimes known as privately-held, owner carry-back, or owner take-back loans.  You may also hear the term creative financing applied to these types of transactions.  These terms all refer the same thing--a cash flow note held by a property seller and secured by the property that he/she sold.) 

Why should I consider offering owner financing if I'm selling a property?  There are many advantages to offering owner financing to sell your home.  You will be able to attract a larger number of interested buyers because there is no barrier to buying your home--a buyer does not have to qualify for a bank loan.  Most homes sell very quickly because once a qualified buyer is located, there is no need to wait for bank approval.  Closing can occur almost immediately, and closing costs are much lower than with a traditional bank loan.  By carrying-back a mortgage or trust deed, you can spread out the taxable gain over time, creating a major tax benefit.  Your mortgage or trust deed will provide you with a solid investment, secured by real estate and earning a respectable interest rate which may be as much as 4-5% more than you could earn on a money market savings account.  Your mortgage or trust deed is also a liquid asset which you can sell for cash at any time.     

If a bank or mortgage lender won't finance a buyer, why should I?  Lending requirements for loans offered through banks and mortgage lenders tend to be very rigid.  As a result, many qualified buyers find themselves ineligible for these loans.  These buyers often have good credit ratings and sizable down-payments, but may not qualify for a traditional loan because of a technicality, such as a recent divorce, relocation, job change, etc.  You will find many buyers that are able to afford your home and can put down a sizable down-payment even though they do not qualify for traditional lending solutions.  Because you will be acting as a lender, you have the right to request a credit report on any person interested in buying your home.  You will be able to judge very easily whether they are a candidate for purchasing your home by examining the credit report, and your loaning requirements do not have to be as strict as the bank or mortgage lender because you don't have to worry about federal guidelines, etc.   

I'd like to offer owner financing to help sell my home, but I need the money from the sale right away.  What can I do?  You can sell the resulting mortgage or trust deed at the same time you close on the sale of your home.  This is called a simultaneous closing.  You may elect to sell all or part of the mortgage or trust deed.  We will work with you to determine which of our many different plans will satisfy your needs.  Either way, you will receive a lump sum of cash at closing. 

What types of properties can be sold with owner financing?  Any type of property can be sold with owner financing.  In fact, many properties which are difficult or impossible to sell otherwise will sell easily with owner financing.  Single family homes, multi-family homes, town-houses, condominiums, commercial properties, land and businesses can all be sold using owner financing.  (*Please note:  Simultaneous closings may not be practical for commercial properties or business transactions.  However, you will be able to sell the note after you have received a few payments on it.)

Is this legal?  First Class Cash Flow Handlers does not condone any illegal activities.  Owner financing is completely legal in all states.  In fact, it is currently estimated that approximately 20% (one in five) of all real estate transactions involve owner financing.

Do I need a lawyer?  Yes, absolutely.  You should never attempt to sell real estate without the advice of a competent real estate attorney. 

Will I need a realtor to sell my home?  While hiring a real estate professional to help you sell your home does has some advantages, it is not required to work with a real estate agent or broker when you use owner financing.  You can use owner financing to sell your home with or without the aid of a real estate agent or broker.

I'm confused by some of terms used.  How can I find out what these words mean?  For your convenience, we have included a glossary below.

Where can I get more information about selling my cash flow note or using owner financing?  For additional information about selling a cash flow note, please see our "Noteholders" page or call us at (401)-258-7158.  For more information about using owner financing to sell your home, we recommend "How To Sell Your Home Fast In Good Or Bad Markets".  You'll also find resources designed to help you create, maintain and secure your mortgage or trust deed on our "Products" page.  You may subscribe to our free E-zine below for more information and free reports as well.

The Cash Flow Clarion is the free e-zine published by First Class Cash Flow Handlers.  It explores current topics within the cash flow field and answers frequently asked questions about cash flow notes and owner financing.  You can subscribe to The Cash Flow Clarion and have current issues delivered directly to your e-mail inbox.  The subscription is free and we will rush you our three FREE reports (An Amazingly Successful Home Sale Technique, Create A Mortgage Worth Cash, and Protect Your Investment) as a "thank you".  Simply fill out the form below and click on "Get More Info".    To view archived issues of The Cash Flow Clarion newsletter, click here.  Or you may view and subscribe to our Cash Flow Clarion blog. 

Glossary

A:

Abstract of Title:   A written history of the transactions or conditions bearing on the title to a designated parcel of land.  It covers the period from the original source of title to the present and summarizes all documents of public record. 

Acceleration Clause:  A clause requiring the purchaser to pay the entire principal balance due if certain conditions of the contract are violated.  A few examples of these conditions are failure to make regular installment payments, non-payment of property taxes, and non-payment of hazard insurance premiums.  This clause most often appears in land contracts under the heading “Enforcement on Default” or “Acceleration Clause.” 

Accrued Interest:  Interest that has been earned but not paid. 

Add-Back Escrow:  In a land contract that utilizes an Add-Back Escrow, the purchaser includes an extra amount with each month’s payment in order to cover future tax and/or insurance bills payable by the purchaser.  The seller then pays property and/or insurance premiums and adds back the amounts paid to the current principal balance owed.  Add-Back escrows in contract usually worded as follows:  “The purchaser is to pay monthly, in addition to the monthly payment herin before stipulated, the sum of $___, which is an estimate of the monthly cost of the taxes, special assessments, and insurance premiums for the land, which shall be credited by the seller on the unpaid principal balance owed on the contract.  If purchaser is not in default under the terms of this contract, seller shall pay for purchaser’s account the taxes, special assessments, and insurance premiums mentioned above when due and before any penalty attaches, and submit receipts therefore to purchaser upon demand.  The amounts so paid shall be added to the principal balance of this contract.” 

Addendum:  An addition to a written document.  Addenda is the plural. 

Agent:  One who undertakes to transace business or to manage an affair for another, with the authority of the latter. 

Amendment:  An alteration to a contract. 

Amortization:  The length of time it will take to pay off a debt at the mutually agreed upon interest rate and payment amount.  

Appurtenance:  Something outside the property itself but considered part of the property that adds to its greater enjoyment, such as the right to cross another’s land. 

Assessments:  The amount of tax or special payment due to a municipality or association. 

Assignee:  The person or corporation to whom an agreement or contract is assigned; one to whom real property or an interest in real property is transferred or set over. 

Assignment:  A transfer from one party to another. 

Assignor:  A party who assigns or transfers an agreement or contract to another. 

B:

Balance Due:  The amount currently owed on a debt; the principal balance due. 

Balloon:  The final payment on a mortgage, trust deed or land contract when that payment is greater than the preceding installment payments and pays the loan in full. 

Bankrupty:  The financial inability to pay one’s debts when due.  The debtor seeks relief through court action that may work out or erase debts.  

Breach of Contract:  A violation of the terms of a legal agreement. 

Buyer:  One who purchases property; also referred to as “Vendee” or “Purchaser”. 

C:

Certificate of Title:  A written statement furnished by an abstract or title company or an attorney stating that the title to a piece of property is legally vested in the present owner. 

Certification:  The act of showing evidence of ownership or debt. 

Chain of Title:  The history of all the documents transferring title to a parcel of real estate, starting with the earliest existing document and ending with the most recent. 

Chattel:  anything owned and tangible other than real estate, for example:  furniture, automobiles, and jewelry. 

Clear Title:  Title not encumbered or burdened with defects such as mortgages, unpaid taxes, or underlying liens. 

Cloud on title:  Any condition revealed by a title search that adversely affects the title to a property.  Usually cloud on title cannot be removed except by a quit claim deed, release or court action. 

Collateral:  Property pledged as security for a debt. 

Commit Waste:  To neglect property or allow it to be used in a way that lessens its value. 

Consideration:  A legal right or promise exchanged for the act, promise or property of another person.  For example, in a contract for the purchase of a piece of property, the property itself and the money paid )or promised to be paid) are the considerations made by the property seller and the new property owner, respectively. 

Convey:  To deed or transfer title to another. 

Conveyance:  The document, such as deed, lease or mortgage, used to effect a transfer of property. 

Covenant:  A legally enforceable promise or restriction in a contract.  For example, a purchaser on a mortgage, rust deed or land contact may covenant to keep the property in good repair and adequately insured against fire and other casualties.  The breach of a covenant usually creates a default and can be the basis for foreclosure. 

D:

Deed:  A written document that conveys or transfers title from one party to another.  There are various types of deed; however, the two most commonly used are warranty and quit claim. 

Deed of Trust:  An instrument used in many states in place of a mortgage.  Legal title to the property is vested in one or more trustees to secure the repayment of the loan. 

Default:  A failure to perform on one or more of the terms of a note or of the covenants of a mortgage or land contract. 

Delinquent Payment:  A payment not paid on a specified payment date.  For example, if a payment is due on the first day of every month and it is not received until the fith day of the month, that payment is delinquent.  If a mortgage, trust deed or land contract has a 10-day grace period, then a payment would not be considered “delinquent” until the 11^th day after the due date. 

Devise:  A gift of real estate by a will or last testament. 

Dower:  Under common law, the legal right of a wife or child to a part of a deceased husband’s or father’s estate, regardless of the provisions in his will. 

Down Payment:  The amount of money paid at the execution of a mortgage or a land contract.  This lump sum of money is subtracted directly from the original sales price.  The remaining principal balance then begins to accrue interest at the specified interest rate. 

Due-On-Sale Clause:  A clause set forth in some mortgages and land contract whereby the lender or seller has the right to “ call in” the balance upon the sale or transfer of the property by the borrower or purchaser to a third party.

E:

Earnest Money:  A deposit made by a purchaser to demonstrate good faith; a down payment. 

Easement:  A right created by grant, reservation, agreement, prescription, or necessary implication, which one has in the land of another.  For example, the right of public utility companies to lay their line across another’s property is a utility easement.

Encumbrance:  Any right to or interest in land that effects its value, including outstanding mortgage loans, unpaid taxes, easements, or deed restrictions; a cloud on title. 

Equity:  The difference between fair market value and current indebtedness (balance due).  For example, if a person owes $10,000 on his home and the market value is now $50,000, he now has 80% equity in his home ($40,000 out of $50,000). 

Escrow:  An agreement between two or more parties providing that certain instruments or property be placed with a third party for safekeeping, pending the fulfillment or performance of a specified act or condition. 

Escrow Account;  An account in which a prescribed amount of money s deposited each time a payment is collected to be used for paying real estate taxes and/or insurance.  For example, a mortgage, trust deed or land contract may require a monthly payment of $260 with an additional $40 to pay taxes and insurance.  This $40 goes into an escrow account which, technically, belongs to the purchase. 

F:

Fee Simple:  The highest and best form of ownership recognized by law.  Owner is entitled to the entire property with unconditional power to sell it. 

First Mortgage:  A real estate loan that creates a primary lien against real property. 

Fixtures:  Improvements or personal property so attached to the land as to become part of the real estate.  For example, a porch would be considered a fixture, whereas a ceiling fan may just be personal property. 

Foreclosure:  A termination of all rights of a mortgagor in the property covered by a mortgage.  Statutory foreclosure is effected without recourse to courts but must conform to applicable laws. 

Forfeiture:  The loss of money or anything else of value because of failure to perform under contract.  For example, because the prospective purchaser failed to keep up payments under the land contract, he or she forfeited all of his or her right to the property. 

Free and Clear Title:  Title to a property without encumbrances.  It is generally used to refer to a property free of mortgage debt. 

G:

Grace Period:  The period during which one party may fail to perform without being considered in default. 

Grantee:  The person to whom an interest in property is conveyed.  For example, in a land contract sale the Grantee is most often referred to as the purchaser. 

Grantor:  The person conveying an interest in property.  For example, in a land contract sale the grantor is most often referred to as the seller. 

Guaranty:  A written promise by one party to pay a debt or perform an obligation contracted by another in the event that the original obligor fails to pay or perform as contracted.  For example, a parent may guarantee payments owed by a son or daughter. 

H:

Hazard Insurance:  A type of insurance bought to insure property against losses due to fire, theft, vandalism, etc.  Most land contracts require the purchaser to carry hazard insurance at all times to protect the seller from insurable losses. 

Heir:  One who inherits property. 

Hereditaments:  Any property, whether real or personal, tangible or intangible, that may be inherited.   

Homeowner’s Policy:  An insurance policy designed especially for homeowners.  Usually protects an owner from losses by common disasters, theft, etc. 

I:

Improvements:  Those additions to undeveloped land such as buildings, streets, sewers, etc., that tends to increase its value. 

Installments:  Parts of the same debt, payable at successive periods as agreed; payments made to reduce a mortgage. 

Insurance Premium:  The amount paid for the purchase of insurance. 

Interest Rate:  The percentage of money charged for its use.  For example, a seller may charge a purchaser 10% interest on the unpaid balance of a mortgage, trust deed or land contract. 

J:

Judgment:  A decree of a court stating that one individual is indebted to another for a certain fixed amount. 

Judgment Lien:  A lien upon the property of a debtor resulting from the decree of a court. 

Judicial Foreclosure:  Having a defaulted debtor’s property sold at a price the court approves. 

L:

Land Contract:  A real estate installment sale arrangement whereby the buyer may use, occupy, and enjoy land, but no deed is given by the seller (so no title passes) until all or a specified part of the sale price has been paid. 

Late Charge:  An additional fee charged to a person for a payment that is delinquent.  The most common methods of charging late fees are to charge a fixed dollar amount or a percentage of the payment. 

Lease:  A contract in which, for a payment called rent, the one entitle to the possession of real property transfers those rights to another for a specified period. 

Legal Description:  A property description recognized by law which is sufficient to locate and identify the property.  A typical legal description will identify the county, township, and section of the township where the land is located. 

Legatee:  One who receives property by a will. 

Lessee:  One who receives property by a lease. 

Lessor:  Onw who leases property to a lessee. 

Liability:  A debt or financial obligation. 

Liable:  Responsible le or obligated.  For example, one who borrowed on a mortgage generally becomes personally liable for its repayment. 

Lien:  A charge against poperty making it security for the payment of a debt, judgment, mortgage or taxes.  A lien is a type of encumbrance.  A specified lien is against certain property only.  A general lien is against all of the property owned by the debtor.   

M: 

Maturity:  The date on which an instrument of indebtedness, such as a mortgage or land contract, becomes due and payable. 

Mortgage:  A pledge of real property as security for the payment of a debt.  With a mortgage, the borrower retains possession and use of the property.  A mortgage is typically signed simultaneously with a note. 

Mortgagee:  The party lending the money and receiving the mortgage. 

Mortgagor:  The party borrowing money secured by real estate and giving a mortgage. 

N:

Notary Public:  One who is authorized by the state or federal government to administer oaths and attest to the authenticity of signatures. 

Notice of Default:  A letter sent to a defaulting party as a reminder of the default.  Such a notice may state a grace period and the penalties for tailing to cure the default.

O:

Opinion of Title:  A certificate, generally from an attorney, as to the validity of the title of property being sold. 

Outstanding Balance:  The amount currently owned on a debt. 

P:

Parcel:  A piece of property under one ownership; a lot in a subdivision. 

Parcel Number:  A number given to a piece of property by the county for tax purposes. 

Payment:  An agreed upon dollar amount paid in regular installments by a purchaser.  The most common installment method for land contract payments is monthly payments. 

Per Annum:  In or for each year annually. 

Personal Property:  Any property that is not real property.  For example, personal property is appliances, cash, securities, furniture, and mobile home not permanently affixed to a site. 

Plat:  A plan or map of a specific land area. 

Plat Book:  A public record containing maps of land and showing the division of the land into streets, blocks, and lots and indicating the measurements of the individual parcels. 

Power Of Attorney:  An instrument authorizing a person to act as the agent of the person granting it. 

Premises:  Land; an estate; the subject matter of a conveyance. 

Principal:  The original amount of the total due on a mortgage, trust deed or land contract; the principal portion of a payment is that portion which is not interest. 

Principal Balance:  The unpaid balance owed on a mortgage or land contract. 

Principal and Interest Payment:  A periodic payment, usually paid monthly, that includes the interest charges for the period puls an amount applied to the amortization of the principal balance.  

Purchase Money Mortgage:  A mortgage given by the purchaser of real property to the seller as part of the consideration in the sales transaction. 

Purchaser:  One who purchases property; also referred to as “Vendee” or “Buyer”. 

Q:

Quit Claim Deed:  A deed that transfers only such interest, title or right as a grantor may have at the time the conveyance is executed; a deed without representations or warranties as to the nature of the rights conveyed. 

R:

Real Estate:  Land and everything attached to it. 

Real Property:  Real estate. 

Representations:  Descriptions as to the quality of character of something.  For example, a building may be represented as being free from structural defects. 

S:

Sales Price:  The mutually agreed upon dollar amount to be paid for a particular piece of property. 

Section:  One square mile in a government rectangular survey.  There are 36 sections in a mix-mile-square township. 

Security:  Something given as a pledge to payment. 

Seller:  Individual who has sold real estate, also referred to as Vendor. 

Sidwell Number:  See “Parcel Number”. 

Subordinate:  One who moves to a lower priority, as a lien would if it changes from a first mortgage to a second mortgage. 

Successor:  One who receives title to property. 

T:

Tenements:  Possessions that are permanent and fixed; structures attached to land. 

Term:  The amount of time (usually computed in months) until the balance of a mortgage or land contract is due and payable.  For example, a land contract may fully amortize over a 10-year period (120 months).  However, the contract may also call for a balloon payment to made at the end of the fifth year (60^th month).  In this case, the term of the land contract would be 60 months or five years. 

Title:  Evidence that the owner of the land is in lawful possession therof. 

Title Insurance:  A form of insurance purchased to protect against any losses or defects in the title of a particular piece of property. 

Title Search:  An examination of public records, law and court decisions to disclose the past and current facts regarding ownership of real estate. 

Township:  A six-mile-square tract delineated by a government rectangular survey. 

Trust Deed:  A claim against real estate similar to a mortgage but title is held by a third part called a Trustee for the Beneficiary. 

Trustee:  One who holds property in trust for another to secure performance of an obligation. 

U:

Underlying Debt:  An original loan that is still in existence.  This loan may be owed on a mortgage, trust deed or land contract. 

Use Restrictions:  A clause in a deed which places limitations or restrictions on the property’s use.  For example, “this property can never be used to sell liquor” or “this property can never be used to raise farm animals.”  These limitations “run with the land” and are therefore binding on subsequent owners.

V:

Vendee:  A person who buys property; another word for “Purchaser”. 

Vendor:  A person who transfers property by sale; another word for “Seller”. 

W:

Warranties:  Promises contained in a contract.  For example, a seller may warranty that a property sold is structurally sound. 

Warranty Deed:  A deed that conveys or transfers title from one part to another with covenants assuring that the title transferred is free from all encumbrances.  

Waste:  See “Commit Waste.”

Y:

Yield:  The rate of return on an investment.  For example, if one invests $100 and receives $15 after the first year, one’s yield is 15% on the invested cash for the first year.