The partial release clause took three weeks out of a seller financed close

Closed last month on 12 acres at $84,000, seller carried. Terms: $16,800 down, $67,200 at 5.5 percent interest only, monthly payments of $308, balloon at year seven. Taxes are $520 and there's no ag valuation to lose because it's never been farmed.

So my all-in carry is about $4,220 a year on a parcel I intend to hold for a decade or more. I've got seven years funded in a separate account and a plan for what happens at the balloon, which is either refinance, extend, or sell part of it.

The part I want to talk about is the partial release. Seller's first draft had none, which means the deed of trust sits on all 12 acres until the note is paid in full and I can't sell a single acre without paying off $67,200. That kills the sell-part-of-it option at the balloon and it kills any interim exit.

What I asked for and got: 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 is standard enough that he didn't fight it. The contiguity language was his idea and it's fair, he doesn't want to be left holding a donut.

The other thing I pushed on was 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 I had a local real estate attorney draft the release language rather than editing his form myself. That was $1,100 and it's the best money in the deal.

What I'd keep: I negotiated the exit before I negotiated the price. Price moved $3,000. The release clause moved the whole risk profile.

3 replies

1mikeoconnell7SP2APRO6

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

1carlos_nunezActive

$308 a month plus $43 of taxes on a hold you're calling a decade. That's $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 I'd want to know now what your refinance options look like on raw land with no income, because in my experience that conversation is short and the answer is a much bigger down payment or nothing.

Which is fine if that's the plan. It's a problem if you're assuming a lender will be there in year seven on today's terms, and nobody can tell you what those terms will be.

2stephen_ok9CO2CPRO6

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.

The partial release clause took three weeks out of a seller financed close

3 replies