Parties will occasionally choose to avoid conventional loan programs and have the Seller carry the risk of the loan. In a Seller-carried transaction, the Seller lends the Buyer all the money needed to purchase the Property, and the Buyer promises to pay the Seller back over time, much like a mortgage. These transactions are accomplished in one of two ways: (1) Promissory Note and Deed of Trust [Forms 8.2 and 8.3]; and (2) Land Sale Contract [Form 8.4].
(1) Promissory Note and Deed of Trust
These types of transaction involve a bit of a two-step dance between the parties. At closing, the Seller “lends” the Buyer all the money needed to buy, the Seller signs a deed transferring the property to the Buyer, the Buyer then simultaneously signs a promissory note promising to pay the Seller back over a certain period of time, and Buyer signs a deed of trust that transfers the property to a trusted, neutral third-party (“Trustee”). The Buyer retains their general ownership and usage rights in the property and the Trustee is only permitted to act when the deed of trust lets them act, generally this means the Trustee only gets involved when the Buyer fails to pay on the promissory note or finishes paying on the promissory note.
The promissory note is just what it sounds like, a note where the Buyer promises to pay the Seller back at a certain rate of interest [interest cannot be over 9% because of ORS 82.010; the minimum interest rate will be determined by the IRS’s applicable federal rate, usually somewhere between 2-3%]. The promissory note will outline the payment terms and what the parties are to do when Buyer fails to repay the note. The promissory note is not recorded or attached to the property, it’s a contract between Buyer and Seller.
The parties then collateralize the promissory note using the Deed of Trust. The Buyer essentially says, “I promise to pay you back on the note, otherwise you can sell the house and get your money out of the sale.” The deed of trust is recorded, so it does attach to the property. The Trustee is a neutral third-party, appointed by the Seller, and can usually be replaced at Seller’s discretion. The note gives the Trustee the power of sale for the property and will state the exact times when the Trustee can foreclose the property, though the most common scenario is “Buyer failed to pay on the promissory note.” If there is a foreclosure, the money from the sale goes (1) to pay off Trustee for their services, (2) to pay off the Seller’s note, (3) to pay off junior liens [if any], and then (4) remaining money goes to the Buyer. Usually this means that Buyer can accrue some level of equity in the property over the course of their ownership. If the Buyer has accrued enough equity, they can oftentimes just purchase the property outright by leveraging the equity into a mortgage (functionally, they “refinance”). The Buyer will have a statutory right of redemption (timeframe where the Buyer can pay off the lien and purchase the property) for up to 180 days after the foreclosure auction.
If the Buyer pays off the entire promissory note or redeems the property, the Trustee will complete a “Deed of Reconveyance” that gives all of the Trustee’s interest in the property back to the Buyer. At that point, the Buyer fully owns the property.
(2) Land Sale Contract
A land sale contract is more like a “rent-to-buy” arrangement. The Buyer technically borrows money from Seller and says, “I’ll pay it back to you over time.” During the term of the Land Sale Contract, Buyer has an “equitable interest” in the property, and can live there and utilize the property as their own, with some limitations. The parties record a memorandum of the land sale (or the entire land sale contract itself) to let the world know that the contract exists [Oregon Realtors® has a Memorandum of Land Sale in our Forms Library: Form 8.5]. The Buyer then starts paying on the land sale contract. In a land sale contract, Buyer accrues no equity in the property; they continue to pay until the entire sum is paid off. Once the sum is paid off, Seller is contractually obligated to execute a deed transfer and Buyer becomes the full owner of the property.
If Buyer misses a payment, Seller can auction the property off without giving Buyer the 180 day right of redemption period. Alternately, the Seller can pursue what is known as “strict foreclosure” where the Seller just terminates the Buyer’s interest [almost like terminating a lease], and Buyer simply has to move out. Lastly, Seller can pursue forfeiture, a process where Seller sends a notice to the Buyer explaining the debt owed and the forfeiture date. If Buyer doesn’t pay off all debt they owe by the forfeiture date, Buyer’s entire interest in the property is eliminated.