Navigating Real Estate Contracts Risks and Best Practices

Real estate contracts offer flexibility for buyers and sellers but also carry potential risks. Without proper planning, a small oversight can lead to financial liabilities, legal disputes, or unexpected loan calls.

Whether you’re using a wraparound mortgage, owner financing, or navigating the due-on-sale clause, knowing how to mitigate risks and leverage best practices can make all the difference.

This guide will help you understand the key risks and best strategies for structuring real estate contracts effectively.

The Due on Sale Clause: What You Need to Know

Most mortgages include a due-on-sale clause, which allows the lender to call the loan due in full within 30 days if the property is resold through a wraparound real estate contract or another form of owner financing. While this situation is rare, it’s still a potential risk that investors should be aware of.

How to Manage the Risk of a Due-on-Sale Clause

Lenders don’t always enforce the due-on-sale clause, but it can happen—especially in high-interest-rate environments where banks prefer issuing new loans at better terms.

If a lender enforces the clause, the remaining loan balance must be paid in full within 30 days, which can create financial strain if you’re unprepared.

To avoid this risk, it’s essential to have a backup plan. Setting aside financial reserves or securing alternative funding options ensures you’re ready in case the lender requires full repayment.

Best Practices to Minimize Risk

• Maintain financial reserves: Keep liquid assets such as stocks, an IRA, or savings available in case the loan is due.
• Work with an escrow company: They can help manage payments, track transactions, and provide structure to minimize lender concerns.
• Stay informed on lender policies: Not all lenders strictly enforce due-on-sale clauses, but understanding their stance can help you plan accordingly.

Why Owner Financing Is a Powerful Tool

Despite potential risks, owner financing and real estate contracts offer flexible and practical solutions, particularly for properties that may be difficult to sell through traditional financing.

Many banks have strict lending requirements, making securing mortgages harder for some buyers. Selling can attract more buyers by offering owner financing while generating consistent cash flow.

For investors, real estate contracts can effectively sell properties without relying on conventional loans. This approach is particularly beneficial for problem properties—those that have sat on the market for too long or don’t qualify for standard financing.

When structured correctly, owner financing allows sellers to maximize returns over time while giving buyers a path to homeownership that might not otherwise be available.

The Role of Escrow Companies in Real Estate Contracts

Escrow companies play a critical role in managing real estate contracts, ensuring that both the buyer and seller adhere to agreed-upon terms. By acting as a neutral third party, they help keep transactions organized and legally sound.

Key services provided by escrow companies include:

• Tracking and processing payments to ensure all financial obligations are met.
• Notifying parties of late payments and managing potential disputes.
• Executing attorney-prepared legal documents to protect both buyer and seller.

Industry professionals like Terry White, CEO of SunWest Escrow in Albuquerque, and Keith Mallory, President of American Escrow, are experts in managing real estate contracts. They help investors navigate the complexities of owner financing by ensuring transactions remain structured, compliant, and financially secure.

Essential Real Estate Contract Terms Explained

Understanding key real estate contract terms is crucial for both buyers and sellers, especially when dealing with owner financing, wraparound mortgages, and escrow services. These terms define the structure of the agreement and help investors navigate potential risks while maximizing opportunities.

Below are some important terms to know when working with real estate contracts.

Real Estate Contract

A legally binding agreement in which a property seller provides financing to a buyer instead of the buyer obtaining a traditional mortgage. This method allows buyers to purchase a property without going through a bank.

Wraparound Mortgage

A form of owner financing where the seller’s existing mortgage remains in place while the buyer makes payments on a new loan that “wraps around” the original mortgage. The seller continues paying their original loan while collecting payments from the buyer at a potentially higher interest rate.

Due-on-Sale Clause

A mortgage provision that allows a lender to demand full repayment of a loan if the property is sold or transferred to a new owner. While rarely enforced, this clause can pose a risk in owner-financed transactions if the lender calls the loan due.

Escrow Services

A neutral third party that holds and manages funds, documents, and legal processes to ensure the transaction is executed properly. Escrow companies help track payments, notify parties of late payments, and execute legal documents to protect both the buyer and seller.

Owner Financing

A real estate transaction is one in which the seller acts as the lender, financing the property sale directly instead of the buyer securing a traditional mortgage. This method can provide flexibility for buyers while generating passive income for sellers.

How to Minimize Risks in Real Estate Contracts

• Work with a Reputable Escrow Company – They will track payments, execute legal documents, and provide security for both buyers and sellers.
• Have Financial Reserves—It’s best to have a contingency plan to pay off the note in case the lender enforces the due-on-sale clause.
• Use Expert Legal Guidance – Consulting with real estate attorneys or professionals familiar with real estate contracts can prevent costly mistakes.
• Screen Your Buyers – Ensure buyers have the financial capacity to fulfill contract terms and avoid potential defaults.
• Stay Informed – Understanding the nuances of owner financing, mortgage clauses, and escrow processes will help you make informed decisions.

Maximizing Opportunities with Real Estate Contracts

Real estate contracts can be a powerful tool for both buyers and sellers. With the right approach, they open doors to flexible financing and investment opportunities. While risks like the due-on-sale clause exist, proper planning, financial preparedness, and escrow services help keep transactions smooth and stress-free.

If you’re exploring owner financing or real estate contracts, having the right team by your side makes all the difference. Our team at Absolute Real Estate is here to help you structure deals effectively, minimize risks, and ensure a seamless transaction. Reach out today and take the next step with confidence.