Seller financing in Colorado: notes, deeds of trust, the public trustee

Bottom line: seller financing means the seller lends part of the price to the buyer. Two papers carry the deal: a promissory note (the promise to pay) and a deed of trust (the house is the backup if the promise is broken). If the buyer stops paying, the seller cannot just move back in. The seller must foreclose through the county public trustee. A broker helps with the idea and the numbers, but does not draft the legal papers or give legal advice.

What seller financing is

Seller financing (also called owner financing or a seller carry-back) is when the seller accepts payments over time instead of all cash at closing. The seller "carries" the loan. A bank is not involved in that part of the price. A buyer who cannot get a normal bank loan, or a seller who wants steady interest income, may like it.

Two documents make it work:

• Promissory note. A written promise to pay a set amount, at a set interest rate, on set dates. The law calls this kind of paper an "evidence of debt" (a writing that shows a promise to pay money, such as a promissory note) (C.R.S. 6-1-1103(3)). The buyer is the borrower and the seller is the lender.
• Deed of trust. A document recorded in the county records that pledges the house as security for the note. Colorado uses a deed of trust, not a plain mortgage, in most loans. It names three roles: the grantor (the buyer-borrower who pledges the house), the public trustee (a county official who holds the power to sell the house if there is a default), and the beneficiary (the lender, here the seller, who is paid back first from a sale).

Colorado's Commission publishes approved forms for these papers. Learn what each form does, not paragraph numbers, because forms change between versions. The note says how much, how fast, and what happens when payments are late. The deed of trust says the house is the backup.

Key loan words

Principal is the amount borrowed. Interest is the price of borrowing, shown as a yearly percent. Amortization is the payment schedule that slowly pays the loan down, here 30 years. A balloon payment is a big final payment of what is still owed at the end of a short term. Sellers often use a 5-year balloon: the monthly payments are figured on 30 years, but the whole balance comes due in year 5, so the buyer must refinance with a bank or sell.

What a broker can and cannot do

• A broker may make known "the different types of financing alternatives," including this one, as a ministerial task (Rule 6.8). Ministerial means a routine task that does not give advice or take sides, like showing a house or passing along an offer.
• Contract papers a broker prepares must show the financial terms accurately, listing every "Thing of Value" paid or received and who gets it (Rule 6.14.A.1). Anything agreed after the first contract goes into a written amendment.
• A broker is not required to prepare legal documents, and cannot charge a separate fee for preparing them (Rule 6.14.B). Writing a note or deed of trust is legal work. Send both sides to an attorney (Rule 6.14.F says brokers must encourage consumers to see an attorney about title matters).
• A broker may not give advice on deeds the broker did not draft (Rule 6.14.G).
• If a buyer gives a promissory note as earnest money (the good-faith deposit), the broker must tell the seller the date the note comes due, and must promptly tell the seller if it is not paid (Rule 5.13). This is a different note from the seller-carry note.

Federal lending rules (such as Truth in Lending and the SAFE Act on loan originators) can reach people who regularly make loans. Those rules are not in our sources. Tell the seller to ask an attorney, especially if the seller will do more than one deal.

Foreclosure basics: the public trustee

If the buyer stops paying, the lender uses the public trustee process in C.R.S. title 38, article 38. A public trustee is a county officer who runs foreclosure sales. In simple order:

1. The holder of the note (the seller) elects to foreclose. A notice of election and demand is recorded.
2. No more than 20 calendar days after that recording, the public trustee mails a combined notice to the people on the mailing list (C.R.S. 38-38-103(1)(a)). It is "combined" because it covers three things at once: the sale, the right to cure, and the right to redeem (C.R.S. 38-38-100.3(4)).
3. Between 60 and 45 calendar days before the first scheduled sale date, the public trustee mails the combined notice again (C.R.S. 38-38-103(1)(b)).
4. A court order authorizing the sale is required (section titled "Court order authorizing sale mandatory," C.R.S. 38-38-105), and sale bids follow set rules.
5. The winning bidder gets a certificate of purchase. Title passes by a confirmation deed after the redemption periods end (section titles, C.R.S. 38-38-401 and 38-38-501).

Right to cure means the borrower (and certain others) may stop the foreclosure by paying what is owed. For a nonpayment default, a person who wants to cure must file a written notice of intent to cure no later than 15 calendar days before the sale (C.R.S. 38-38-104(1)). Then the officer asks the lender for a statement of every dollar needed to cure, at least 12 calendar days before sale (C.R.S. 38-38-104(2)(a)(I)). Right to redeem means certain lienholders may pay off the sale bid after the sale to take over the property.

Key point for a seller-lender: the seller cannot change the locks. Even an installment land contract seller is treated as a lienor for redemption purposes (section title, C.R.S. 38-38-305). Give the seller the foreclosure steps in the paperwork so there are no surprises.

The Foreclosure Protection Act

Colorado protects owners whose homes are in foreclosure from people who prey on them. The rules are in C.R.S. 6-1-1101 and following. Two key people:

• Equity purchaser: a person who is not buying the house as a personal residence and who acquires title to a residence that is in foreclosure. The law lists exceptions, such as a lender taking a deed in lieu of foreclosure under certain conditions, someone buying at the public trustee or sheriff sale, a purchase ordered by a court, a purchase from a spouse or relative, regulated banks and title or escrow companies, and a short sale that uses the Commission's short sale addendum (C.R.S. 6-1-1103(2)). This is the group wholesalers and investors can fall into, so check the definition before buying from an owner in foreclosure.
• Foreclosure consultant: a person who does not take title but offers, for pay, to stop or delay the sale, win a forbearance (a lender's agreement to pause), help the owner cure, or get a loan (C.R.S. 6-1-1103(4)). Lawyers, lenders and servicers, and regulated banks and similar companies are excluded.

A foreclosure consulting contract has strict required terms (C.R.S. 6-1-1104):

• In writing, and given to the owner at least 24 hours before signing.
• At least 12-point type, with the consultant's name and address and the date signed.
• Fully describes the services and the total pay.
• Dated, signed by every owner and the consultant, every page initialed, and notarized in the owner's presence.
• A bold notice in at least 14-point type near the signature line, and a tear-off "Notice of Cancellation" form.
• The owner gets a signed, dated, acknowledged copy right away. The cancellation clock does not start until the consultant has done all of this.

Rescission (the right to cancel) is wide open: the owner may cancel at any time, in any written words that show the intent (C.R.S. 6-1-1105). On cancelling, the owner repays money actually spent for the owner within 60 days, with interest at the prime rate plus two points, no more than 8 percent a year. The consultant cannot make cancelling depend on repayment. Any term that waives these rights, or that forces a jury waiver, an out-of-state court, or fees above actual costs, is void (C.R.S. 6-1-1106).

Example with real numbers

A seller sells a Boulder County house for $300,000. The buyer puts $60,000 down. The seller carries $240,000 ($300,000 - $60,000) at 7 percent, amortized over 30 years, with a 5-year balloon.

1. Monthly rate: 7% / 12 = 0.5833% a month. Number of payments over 30 years: 360.
2. Standard loan formula gives a monthly payment (principal plus interest) of $1,596.73.
3. Payment 1: interest = $240,000 x 0.005833 = $1,400.00. Principal = $1,596.73 - $1,400.00 = $196.73.
4. After 60 payments the buyer has paid about 60 x $1,596.73 = $95,803.56. Of that, about $81,719 is interest and only about $14,084 pays down principal.
5. Balance left: $240,000 - $14,084 = about $225,916. That is the balloon. Month 60 must also include this payoff.

Lesson from the math: after five years the buyer has barely dented the loan, so a buyer who cannot refinance faces default. If the buyer defaults, the seller starts the public trustee process above. If the buyer fixes it, the buyer can cure by paying what is owed on a statement the lender files. If the house was in foreclosure and a flipper offers to buy it from the owner, the flipper may be an equity purchaser and must follow the Foreclosure Protection Act.