Curt Epperson, 

Attorney at Law

P.O. Box 627   Manson, WA.  
509 687 6236

Articles 

Legal Links     

Back to home page.

Information herein is  for general purposes only and cannot be used or applied to any specific legal situation or relationship.

The information contained in these Web pages is designed to provide information in regard to the subject matter covered. This Web presentation is not a legal, financial or accounting service, nor legal, financial or accounting advice. If legal advice or other expert assistance is required, the services of a specific professional advisor should be obained.

Seller Financing:  Choosing Between a
Real Estate Contract or Deed of Trust

When property has Seller financing the Seller retains the right to regain clear title if the Buyer stops paying.  (This is called a “security interest”.)  Most modern transactions use either a Real Estate Contract or a Deed of Trust. 

Laws vary among States, but there are differences between a Real Estate Contract and a Deed of Trust.  Let’s look first at the Real Estate Contract.

 1.                The Seller receives a down payment and the Buyer agrees to make payments.

2.                Title to the property remains with the Seller.

3.                The deed is recorded and title is transferred when the Buyer makes the final payment.

4.                Until then, a signed deed should be held in escrow so the Buyer knows the deed is available at the time of final payment.

5.                If the Buyer fails to make payments the process of foreclosure (called “forfeiture”) is relatively simple.  A notice goes to the Buyer specifying the items of default and the amount owing and Buyer has time to bring the payments current.  If the Buyer doesn’t do so, the Seller records a “Declaration of Forfeiture” to terminate the contract. The contract ends and the Buyer has no further right to the property.

A Deed of Trust is slightly more complicated.

1.                The Seller receives a down payment and the Buyer gets title to the property.   The Buyer signs a promissory note and a Deed of Trust.  It gives the Seller the right to foreclose.

2.                When the Buyer makes the final payment a “reconveyance” of the Deed of Trust is recorded to clear the title.

3.                If the Buyer stops paying the Seller can foreclose.  A notice goes to the Buyer specifying the items of default and the amount owing.  The Buyer is given time to bring the payments current.

4.                The notice must be published in a newspaper and it schedules a foreclosure sale. If the Buyer doesn’t make the past due payments the property is offered for sale at a public auction.

5.                Anyone can bid for the property.  Proceeds of the sale go to pay all the expenses and then to the balance owed to the Seller.   Any extra goes back to the original Buyer.  (Usually, there isn’t anything extra.)  The highest bidder gets the property.

This outline highlights the biggest difference between a Real Estate Contract and a Deed of Trust.  It is usually more expensive and more time consuming to foreclose a Deed of Trust.  Therefore, many Sellers prefer the Real Estate Contract.

In either case the parties should set up a formal means to collect payments.  Buyers and Sellers often prefer an escrow collection account.  It will keep track of principal and interest, send out the IRS tax notices, and transfer the final documents at the time of final payment.  It’s usually easier to make regular payments to the same company over many years than to keep track of an individual Seller who may move or die.   So whether you choose a Real Estate Contract or a Deed of Trust an escrow collection account is a good idea.