Using an Escrow Account When you do Seller Financing or Lease Options

One recommendation that I often make is to open an escrow account whenever you do a seller financed or lease option deal. Why? No matter if you are on the seller or the buyer side of the deal, it is a good idea. When you have an escrow account in place all parties have the right to check to make sure payments are being made on time. It is a third independent party who handles the disbursement of funds too, so it is not a he said she said situation. The third party collects, tracks, and distributes the funds in the escrow account according to the agreement buyer and seller set up. There are fees involved, but most escrow agents will not charge a large fee for this service.

How does it help the seller? The seller can easily track when the buyers payment comes in, so if there are payment issues or a delinquency they can address these quickly. They do not have to wait for the "check in the mail" and in most cases the escrow company will handle the past due notices and payment tracking for you. At the end of the tax year they will give the seller and buyer their respective tax records. (You will want to make sure these services are included in their normal servicing.)It makes it a lot easier for the buyer to attract a note buyer to buy their promissory note, because there is a clear payment history for them to see.

How does it help the buyer? The buyer cna make sure that the underlying mortgage, taxes, and insurance are being paid. In the case of a lease option, they can make sure that the option credits or consideration are being credited and retained as agreed, so they can use that later on when they exercise their option.