You may have heard the term Agreement of Sale and wondered what it is and how it can be used to buy a house or sell a house. What is it? When is it used or not used? Is it even legal?
An Agreement of Sale is simply an agreement between a buyer and seller to a sell a piece of real estate. That’s it — it doesn’t need to be complicated. However, the terms of the Agreement are what really designate how the transaction will unfold.
The biggest difference between an Agreement of Sale and a standard Purchase and Sale Agreement that you may be more familiar with is that the Agreement does not actually transfer the deed until all the terms are met, typically when the house is paid off in full.
Agreement of Sale Example
Let’s say Jennifer wants to sell her house in Honolulu to Bill who agrees to buy it for $600,000. Jennifer owes no mortgage on the property and doesn’t necessarily need all the money right now (good for her!). Jennifer would like about $50,000 now and is ok with Bill paying the balance in monthly installments.
She and Bill enter into an Agreement of Sale whereby Bill pays $50,000 now and makes monthly payments of the balance, plus whatever interest they agree on, directly to Jennifer or through her attorney as she chooses. The deed of the property does not transfer to Bill until he has successfully paid off the entire balance. At that point, Bill becomes the free and clear owner of the house.
Benefits of an Agreement of Sale
Why would either party enter into such an agreement? Let’s look at it from both sides.
For seller Jennifer, if she doesn’t need the money now, then maybe she wants to be the bank and earn interest in exchange for getting all her cash now. If she can make a higher interest return from Bill than she could in a bank account or stock market, then maybe this makes financial sense. And remember — she retains the deed until the house is paid off in full.
For buyer Bill, perhaps he can’t qualify for a long right now due to some dings on his credit score. This is a way for him to still get his foot in the door of the real estate market. If he’s able to build his credit enough to get financing, then perhaps he can pay off his debt to Jennifer earlier.
Both Buyer and Seller Must Benefit
As with any transaction, it has to benefit both parties.
Of course, a house doesn’t need to be owned free and clear to work. Just a couple months ago, we bought a property in Kaneohe via an Agreement of Sale. We brought the mortgage current as part of the Agreement and are now midway through renovations before we soon hit the market. We are now making the monthly mortgage payments for the seller instead of having to cash her out completely. This saves us capital expenses as well as lets us put more money in the pocket of our home seller. Everybody wins!
We’re also buying a separate property next week via an Agreement that is owned free and clear. The sellers were ok with the terms and so everybody is happy. That’s in Kaneohe, too — I suppose we’re doing well in that part of the island!
If you have any questions, please be sure to leave them below.