Archive for July, 2010

Who owns the property when a New Mexico real estate contract is used in a seller financed transaction?

July 14th, 2010

Real estate contracts (REC) are used in about 95% of all seller financed sales. A REC is a legally enforceable agreement by which a seller agrees to sell, and a buyer agrees to buy the property on a deferred payment arrangement. If the buyer performs all his obligations under the contract, he is entitled to receive a deed from escrow conveying the legal title to him. The seller and buyer jointly appoint a neutral third party as escrow agent to hold documents, collect and disburse payments, maintain a payment ledger and deliver the documents upon payoff or forfeiture as instructed. If the buyer defaults, the seller has the option to either (1) declare a forfeiture of the buyer’s interest in the property without court action and recover a deed from escrow conveying the buyer’s equitable interest to the seller, or (2) declare the entire unpaid balance of the purchase price to be due and payable, and file suit to collect.

The real estate contract does not transfer legal title to real estate. Instead, it obligates the seller to transfer the legal title to the buyer upon the happening of some future event. The transfer of legal title is always done by a separate deed of conveyance, usually a warranty deed, which is placed in escrow when the REC is signed.

The REC does, however, transfer an interest to the buyer, known as “equitable title”. If the buyer defaults on the performance of his contract obligations and the seller elects to terminate the contract, it is essential that the seller recover this equitable property interest from the buyer, in order to have clear title to the property. For that reason, the buyer signs a special warranty deed which is placed in escrow together with the sellers warranty deed to the buyer.

The buyer gets the use of the property. They benefit from any appreciation. They also get to deduct the property taxes and interest they pay on their income tax return. The seller must report any interest they receive to the IRS.