When an investor wants to buy a property and financing is scarce or too costly, one solution is a contract of sale. The buyer makes mortgage payments directly to the seller, who retains title to the property until the mortgage is retired. The purchaser puts down a certain amount on the contract and agrees to monthly payments of both interest and principal. Seller-financing arrangements have long been used in commercial real-estate transactions. Since the arrangements are often complicated, a lawyer should advise you at every stage.

The seller of a property should be the first person you consider when thinking about financing. Not only is he an excellent prospect for carrying back a large second trust deed or mortgage loan, but he may also make an attractive deal on the first. One advantage of seller financing is that he won't charge you a loan fee. Also, he will resist foreclosing. So, if you want to readjust the mortgage payments, he will probably consider working something out with you. The needs and motives of the seller will dictate how favorable a mortgage you can negotiate from the seller. Some sellers are just trying to get out from under their mortgage payments. You can step in and save their credit rating.

Most contract sales involve a negotiated down payment and a short-term balloon loan provided by the seller. The loan is like the balloon made by conventional lenders, but may carry a lower interest rate and no points are charged at closing. Under the agreement, the seller holds title to the property until the terms of the contract are met. The contract will spell out the amount of down payment, length of contract, and the amount of payments to be made by the buyer. Although the monthly payments in a contract deal are based on a 25 to 30-year amortization schedule, most contract deals call for a lump-sum bal-loon payment at a specified time.

Contract buyers, however, don't have the same legal rights as other mortgage borrowers. The biggest risk for a contract buyer is fast foreclosure triggered by late payments. The biggest risk for a contract seller is getting the property back on his hands because of foreclosure because of not paying the property tax, making payments, or tolerating code violations. While it takes at least a year to foreclose on a mortgage, a seller can foreclose on a contract buyer in as little as 60 days.

If the contract deal is tied to an existing mortgage, problems can arise for the buyer if the seller doesn't meet his loan obligations. The buyer's lawyer should make provisions in the contract that allow the buyer to make payments directly to the lender if the seller fails to pay his mortgage. The deed should be placed in escrow at a title insurance company to avoid estate problems if the seller dies before the contract is paid off.

Seller financing may be a reasonable investment for certain sellers. It makes most sense when it helps the seller get the full price he couldn't other-wise get. Contract sales have played a major role in keeping the resale market alive during times of high interest. However, contract sales can backfire. If the new owner fails to make a payment on the mortgage, the bank will file a foreclosure suit and name both the original owner and the new owner as defendants. If this happens, you will have difficulty getting another loan or a charge account because of the lawsuit filed against you by the bank holding the mortgage.