Hawaii Real Estate Why Use an Agreement of Sale
Land Trust: When title is being held in Trust where trustee is given specific instructions. For example, Owner places title in the name of trust. The instrument is designed in such a way trustee’s sole authority in administering is to hold tile. In the event of a sale owner signs an Agreement of Sale granting Trustee permission to sell. The new owner makes the purchase under the terms of the sale with Trust intact. The new owner would then have the option to hold title as they see fit.
What would be the benefit of arranging such a process? The most obvious advantage that comes to mind is how HARPTA and FIRPTA would be handled. Worst case scenario involves foreign ownership. By establishing a Trust where title is held and resides with a Trustee who is a citizen of the US and a resident of Hawaii the tax liability can be minimized. The obvious question is professionally who would be the best person to administer such a Trust. The answer a neutral third party. Someone such as an attorney or a specialty Real Estate Brokerage setup specifically as a holding company with experience in such matters.
Seller Financing: Most mortgages are written with an escalation clause. Most lenders will not allow a change in title unless the debt is first paid in full. With an Agreement of Sale title does not change hands. However under the best conditions it is recommended to get lender approval before proceeding. Care must be taken to financially qualify the buyer. The agreement should be written by a lawyer or an expert in the field. Also a neutral third party should be hired to administer over the process. Depending on advice of the expert the agreement should be recorded or held in safe keeping by an attorney. Provision should be made upon satisfactory completion of the terms title automatically transfers to buyer.
What is the advantage? In today’s economic climate this allows the seller to expand the pool of buyers the property can be marketed to. For example, buyers who are more than capable of carrying the monthly payments but who do not have 35% to put down. There are many more qualified buyers who may have 15% or 20%. The term of such an agreement is generally 5 years or less. With the buyer converting to a conventional loan or paying remaining balance in cash.
Also, in the case of condo hotels many lenders are no longer writing mortgages for this type of real estate. For all intent and purposes these properties are being redlined. Lenders feel they are over exposed in a market where owner occupancy is low, transience is high and HOA delinquency rates are unacceptable.
There are pitfalls for the Buyer and Seller. For Buyer there is the need to take care to assure seller can no longer encumber the property. In the case of the Seller in the event Buyer fails to uphold his or her end of the deal it will not be as easy recovering the property like a simple eviction process. There will instead be a need for a full foreclosure process to take place.
Making the Case: It highly unlikely there will be many transactions that will use a trust instruments like the one mentioned above in combination with seller financing. Ideally mortgage free properties are better options to use an agreement of sale. Obviously properties such as condo hotels that can not get financing are potential prospects for seller financing. In any cases these are difficult transactions. So to minimize complication recommend they be used only when logic dictates. Just like the no doc loans of old such instruments intended designed were legal specific. Operating outside that specificity runs a high risk the process will fail. Yet the advantage when correctly implemented can help facility the sale. Also the correct use can save the recipients tens of thousands of dollars.
Often the agreement of sale is amortized over 20 or 30 years to determine the monthly payment with a balloon payment at the end. As mentioned with the term of the loan less than or equal to 5 years. Still there is room for abuse. When entering into such an agreement it is necessary that all parties be educated about the pitfalls and the need for contractual safeguards to be effective. Such measures can be many in number but the intent and professionalism off all parties involved becomes the focal point. Real Estate to use a metaphor is a team sport where the out come will eventual be measured by how well the players on the field perform and know the game. It is incumbent upon the principles to put the best team together as possible. It is essential to have good advisors. In this case having an excellent realtor, attorney and accountant is a must.