Quick Answer
Before structuring any creative finance transaction, answer questions about ownership, existing debt, what each party needs, whether existing financing remains, who makes each payment, how title transfers, what happens in default, and what state and federal requirements apply. Here are 25 questions to ask.
- Who holds legal title to the property? Verify current vesting and confirm the seller authority to sell.
- Are there multiple owners? All owners must join the transaction.
- What existing debt is secured by the property? Identify every mortgage, deed of trust, and lien.
- What are the terms of each existing loan? Balance, rate, payment, maturity, due-on-sale clause.
- Is the existing loan assumable? Check the loan documents and lender policy.
- What is the property worth? Current market value, not what was paid.
- What does the buyer want to accomplish? Occupancy? Investment? Flip? Rental?
- What does the seller want to accomplish? All cash? Income stream? Tax deferral? Quick sale?
- Will the existing financing remain after the transaction? This determines whether the deal is a wrap, subject-to, assumption, or payoff.
- Who will make payments on the existing loan after closing? Buyer? Seller? Servicer?
- How will payments flow from buyer to the lender? Direct payment, through seller, through servicer?
- Will new seller financing be created? Promissory note and deed of trust?
- What are the terms of any new financing? Principal, rate, amortization, balloon, default.
- What is the lien priority? Which lien is first, which is second?
- How will title transfer? Warranty deed, special warranty deed, quitclaim?
- What title exceptions will be listed? Commitment Schedule B items.
- Will a title insurance policy be issued? Owner policy? Lender policy? Available endorsements?
- What disclosures are legally required? Federal, state, and local requirements.
- Who will service the financing after closing? Seller? Professional servicer? Self-directed?
- How are property taxes and insurance handled? Escrows? Paid directly?
- What happens in default? Foreclosure under deed of trust? Forfeiture under contract? Judicial or non-judicial?
- How does the transaction end? Payoff at maturity? Refinance? Sale of property?
- What are the tax implications for each party? Consult a tax advisor.
- What are the state-specific legal requirements? Texas, Arizona, and other states each have their own laws governing creative finance.
- Can every party explain the structure in plain language? If not, revisit the structure.
Creative Finance Is Not About Being Clever
The goal is not to be clever. It is to structure a transaction that works for both parties, is properly documented, complies with applicable law, and can be closed and serviced without unexpected problems.
Download These Questions
This list is also available as a downloadable resource. Contact 1st Option Title to request the full list as a PDF. Not legal advice. Consult qualified professionals.