Dear Angie:
I am thinking about selling my home and offering “seller financing”.  I understand right now with interest rates so high, it is hard for purchasers to qualify for traditional loans with the debt/income ratio required.   Can you tell me about the differences between a note and trust deed and a real estate contract? - Patty in Spokane

Dear Patty:

While I am not an attorney and I cannot give legal advice, I can tell you the definitions of each of those documents that I refer to when I teach the seller financing class to real estate agents.   I have been involved in the escrow industry for 50 years this month and seller financing has been a big part of most of my career.  

DEED OF TRUST:
     A deed of trust is an instrument used by a lender to secure real estate as collateral for a note.  The Note states the “terms of the loan”.  The borrower is in title to the property, (is the owner of the property).  A third party is named as the Trustee to release the lender’s interest in the property once the loan is paid and is also given the power to sell the property in case of non-payment.
     Release of lender’s interest at Final payment:  The lender surrenders the original note and deed of trust and request for full Reconveyance to the Trustee.  The Trustee executes and records a Reconveyance which releases the Deed of Trust from public records.
     To avoid possible loss or misplacement of original Note, Deed of trust and request for full Reconveyance by a private party lender, a neutral third-party long-term escrow collection company could assist in holding the documents in safekeeping, collects payments and releases the document upon final payment. 

REAL ESTATE CONTRACT:
     A real estate contract is an instrument used when an owner of real estate agrees to sell the property and accept periodic payments from the purchaser.  The seller remains in title to the property, (is the legal owner of the property), while the purchaser is entitled to possession of the property and the right to acquire title to the property in accordance with the terms of the contact.
     Release of Lender’s interest at final payment:  The Real Estate Contract seller executes and records a Warranty Fulfillment Deed, which releases the debt and places the purchaser in title to the property.
     The Warranty Fulfillment Deed can be prepared by a Limited Practice Officer or attorney and signed by the contract seller at the time of preparing the Real Estate Contract.  The original document can be held in by a neutral third-party long-term escrow collection company.  The escrow collection company holds the documents for safekeeping, collects the payments and records the document upon final payment.

Those are just the definitions of the two types of instruments.  There are many other differences between the instruments.  If you are considering this type of sale, contact your attorney for more legal advice on the specifics.  And, in the class I teach, I always recommend contacting your accountant for their advice on this type of sale and how it will affect you.   Use the advise of professionals, that is what they are there for.

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Angie DeArth

509-216-3320

Pacific Northwest Escrow
7008 N. Market St.
Spokane, WA 99217