What is legitimate seller financing?
When a sale involves seller financing (also called a vendor take-back mortgage), a seller may own their property outright (i.e. there is no mortgage.) The seller agrees to sell the property to a buyer in exchange for a buyer’s monthly payments, including interest – as opposed to the full purchase price upfront. The seller registers a mortgage on the property to secure their interest in the property, much like a traditional lender would. “Rent to own” agreements may also be viewed as seller financing. Rental payments are made to a seller and over time the buyer may own the property. These agreements may also be registered on title.
What is the scam?
RECA is seeing a rise in incidents where a person advertises a property for sale and offers misleading or fraudulent seller financing. The scam leads buyers and sellers to believe they have entered into a legitimate real estate purchase contract when they have not. The fraudster may be a buyer, seller, or individual acting on behalf of the buyer or seller.
- A property may be advertised for sale where the seller is offering seller financing. This attracts buyers who are looking for alternatives to own a home. In other cases, a buyer may approach a seller with the idea of “seller financing” to help make the deal work.
- The buyer enters into a real estate purchase contract with the seller. The buyer purchases the property without immediately paying the full purchase price.
- The buyer believes they can simply make payments to the seller and live in the property. The buyer may register a caveat on title claiming an interest in the property.
- The seller has a mortgage on the property from a financial institution registered on title. The financial institution does not know about the seller’s “sale” to a buyer and the seller has no right to make this “sale.”
The impact of the scam
- Victim buyers of the scam will likely have paid money to the fraudster with no resulting interest in the property.
- Victim buyers may have to leave the property.
- A fraudster saying they are acting on behalf of the seller does not give the money to the seller or make mortgage payments to the financial institution. When the seller’s mortgage payments have not been made or the financial institution finds out about the sale, the financial institution may foreclose on the property.
- Victim sellers of the scam are faced with continued payments of the mortgage and the difficult task of removing a buyer from their property. The property may incur significant damage.
How to avoid these scams
As the governing authority for regulating real estate industry professionals in Alberta, RECA asks consumers to consider the following advice and red flags to avoid these fraudulent and misleading seller financing situations:
- Hire your own licensed real estate and mortgage brokerage professionals: your own licensed professionals must act only in your best interests – above their own interests and those of other people. If a real estate professional representing a seller suggests a seller financing opportunity to facilitate a transaction between the seller and the buyer, this isn’t necessarily a fraudulent offer, but it may be a red flag and warrants further review. Your own real estate and mortgage professional can make sure your interests are looked after. Check your professional’s licence by using RECA’s “Find a Professional” tool on the RECA website.
- Talk to a lawyer: have your own lawyer review any purchase contract with seller financing to ensure the agreement is legal and consistent with what is being offered. If the seller or the seller’s real estate professional insists on using a specific lawyer, this may be a red flag.
- Verify the property title: it is always good to know exactly who owns the property and whether legal instruments, including a mortgage, are registered on title. If you are offered seller financing and there is a mortgage on title, this may be another red flag. Financial institutions are unlikely to approve seller financing arrangements. You can search titles online through Service Alberta’s Spatial Information System.
- Know who will hold the title: if the seller or the seller’s representative says they will hold the title “in trust” and not transfer it immediately to you, this is a red flag. They may not be telling the truth. Without your name on the title, you are not the legal owner of the property.
- Ensure the purchase contract is complete: read the purchase contract to ensure it specifies who payments are to be made to and whether current mortgage lender approval is needed for seller financing. It may be a red flag if the contract does not specify this.
More information can be found in our Information Bulletin about Mortgage Fraud Red Flags.
If you suspect a seller or a real estate professional is involved in fraud, contact us at firstname.lastname@example.org, or submit an anonymous tip using our online fraud tip submission form.