Thursday, February 1, 2024

An important and frequently discussed section of the 2024 Annual Commission Update course (the “ACU”), the required annual course for all real estate brokers, pertains to alternative types of financing. There are several reasons for this section being included in the 2024 ACU including, but not limited to: (1) the complicated interchange between broker licensure, mortgage loan origination, and legal advice, and (2) the increased occurrence of these transactions resulting from various market conditions.

The Division has received both inquiries and complaints from across the State about offers that include alternative financing. In addition to conventional, VA, and FHA financing, there are several different types of alternative financing that practitioners should familiarize themselves. Alternative financing might include “Subject To” financing, wraparound financing, seller financing, installment land contracts, and loan assumptions.  This article will briefly describe each.

1. Wraparound Mortgage (a/k/a “Wrap”): In a wrap, the buyer becomes the owner of the property, but makes payments to the seller so that the seller can continue to make payments on their existing loan. Commonly, wraps result in two loans after closing: the original loan held by the seller and an additional loan. This additional loan will typically cover a pre-determined amount as agreed by the buyer and seller which might range from as small as a down-payment to all of seller’s equity and a portion of the seller’s loan balance. The buyer will make payments to the seller and the seller will make payments on the original loan. In the case where wrap financing is proposed, both the buyer and the seller should consult separate legal counsel.
2. Installment Land Contract (“ILC”): As evidenced by Commission Position Statement 23, the popularity of ILCs has varied over time but the design historically has remained the same. An ILC is an agreement where a buyer takes possession, but not ownership of the property, and makes periodic payments to the seller. During the time that the buyer is making payments, the seller continues to own the property. After the final installment payment, the deed to the property will be transferred to the buyer. In the case of an ILC, both the buyer and the seller should consult separate legal counsel.
3. Assumable Loan: With an assumable loan, the buyer takes possession of the property AND the legal responsibility for the loan from the seller. Assumption of the loan is commonly completed with the permission and authority of the lender.
4. Seller Financing: Seller financing allows the seller to act as the lender and the buyer obtains satisfactory financing from the seller. When seller financing is involved in a transaction, both the buyer and the seller should consult separate legal counsel.
5. Subject To Financing: When a buyer purchases a property subject to the seller’s financing, the buyer takes ownership of the property and makes payments on the loan, but the seller remains responsible for the loan. Therefore, if the buyer fails to make payments, the seller will be liable to the lender.

As previously mentioned, the Division has heard reports from licensees and consumers that offers that include some form of alternative financing have increased. In some cases, sellers have received a multitude of offers on the same property which are contingent on alternative financing: some from out-of-state investors and others from Colorado. Regardless of the origin, brokers still have an obligation to present all offers to their consumers. Brokers should review the uniform duties which are set forth in the various Commission-approved listing contracts for more information.

If a seller is considering one of these offers, the broker should instruct the seller to contact their lender to determine if the proposed transaction violates the terms of their loan. Remember that as a broker, you are required by Commission Rule 6.2 to possess the necessary experience, knowledge, and training to complete a transaction. If you do not, you should either not accept the transaction, or should obtain appropriate training, partner with another broker, or consult your employing broker, supervising broker, or an experienced Colorado attorney.