A partial release clause can take weeks out of a seller financed close

Take a case worth studying: 12 acres closing at $84,000, seller carried. Terms like $16,800 down, $67,200 at 5.5 percent interest only, monthly payments of $308, balloon at year seven. Taxes around $520 and no ag valuation to protect if the land has never been farmed. All-in carry on a parcel like that runs about $4,220 a year for a buyer planning to hold a decade or more. A prudent structure funds seven years in a separate account and has a plan for the balloon already: refinance, extend, or sell part of it. The clause that decides whether that last option exists is the partial release. A seller's first draft often has none, which means the deed of trust sits on the whole parcel until the note is paid in full and no acre can be sold without paying off the full $67,200. That kills the sell-part-of-it option at the balloon and kills any interim exit too. What a buyer should ask for, and can usually get: release of any acre on payment of 125 percent of the pro rata principal, so $7,000 per acre against a $5,600 pro rata, with released parcels required to be contiguous to a boundary and to leave the remaining collateral with road frontage. The 125 percent figure is standard enough that most sellers accept it without a fight. Contiguity language protects the seller too, since nobody wants to be left holding a donut of unsellable acreage. The other point worth pushing on is no prepayment penalty and the right to pay principal down in any amount at any time, which is what makes the release clause usable in the first place. Seller financing terms are entirely negotiable and how a deed of trust or mortgage records and forecloses varies by state, so this is language worth having a local real estate attorney draft rather than editing a seller's form directly. Call it $1,000 to $1,200 well spent. The lesson: negotiate the exit before the price. A few thousand dollars of price movement matters far less than a release clause that changes the whole risk profile.

3 replies

mikeoconnell7 SO3CPRO 12

A release of any acre at 125 percent with a contiguity requirement is tighter than most seller paper on land. Did he have a lawyer of his own, or did he sign what yours drafted?

mikeoconnell7 SO3CPRO 12

carlos_nunez AA4APRO 12

$308 a month plus $43 of taxes on a hold you are calling a decade. That is $42,000 of payments over ten years on an $84,000 parcel, none of it touching principal. The balloon at year seven is the real deadline, and it is worth knowing now what refinance options look like on raw land with no income, because that conversation is usually short and the answer is a much bigger down payment or nothing. Which is fine if that is the plan. It becomes a problem if you are assuming a lender will be there in year seven on today's terms, since nobody can tell you what those terms will be.

carlos_nunez AA4APRO 12

stephen_ok9ActivePRO

Quarry's right that the balloon is the live risk, and the release clause is what makes it survivable. At year seven you can sell three acres at $7,000 of principal each, knock $21,000 off the balance, and refinance or re-negotiate a smaller number. Without the clause you're negotiating from zero optionality with a seller who knows it.

That's the thing I'd take from this post. The clause isn't worth anything today. It's worth everything on one specific day in 2032, and you have to buy it now.

stephen_ok9ActivePRO

A partial release clause can take weeks out of a seller financed close

3 replies