Seller Financing in Washington: The Instrument You Took Decides What You Get When the Payments Stop

What did you actually sign, a real estate contract or a note and a deed of trust?

A real estate contract, for purposes of the forfeiture statute, is any written agreement for the sale of real property in which legal title is retained by the seller as security for payment of the purchase price. RCW 61.30.010(1). The buyer takes possession and the obligation to pay. You keep the deed.

On a note and deed of trust you do the opposite. You convey the property at closing and take back a lien. A deed of trust is subject to the laws relating to mortgages on real property except as its own chapter provides, and it may be foreclosed by trustee's sale. RCW 61.24.020.

Nothing in the monthly payment tells you which you have. Look at whether a deed went into the buyer's name at closing. If it did, your remedy is foreclosure. If not, it is forfeiture.

What does forfeiture under chapter 61.30 RCW do to each side?

Forfeiture cancels the buyer's rights under the contract and terminates all right, title, and interest in the property of the buyer and everyone claiming through the buyer. RCW 61.30.010(4). It is not a lawsuit. It is done by giving and recording the notices the chapter specifies, and a buyer's rights cannot be forfeited any other way. RCW 61.30.020(1).

What the seller gets

The buyer, and everyone properly noticed who claims through him, loses all rights in the contract and the property, with no right of redemption. Every dollar already paid is retained by the seller, and the buyer's improvements and unharvested crops and timber are forfeited to the seller. RCW 61.30.100(2). Possession follows ten days after the declaration of forfeiture is recorded. RCW 61.30.100(3).

What the seller gives up

After the declaration is recorded, the seller has no claim against the buyer for any unpaid part of the price or any other breach. RCW 61.30.100(4). The exception is waste, and only where it leaves fair market value on the recording date below the unpaid obligations plus every senior lien. So forfeiture is a trade: the house, the improvements and every dollar paid, against the rest of the price.

Who has to be notified, and what happens when somebody is not?

Two notices do the work. A notice of intent to forfeit starts the clock; a declaration of forfeiture finishes it, and that one must be signed and sworn to by the seller. RCW 61.30.050(1). The cure date in the notice of intent cannot be less than ninety days after it is recorded, and RCW 61.30.070(1) requires eleven other items with it, among them an itemized statement of everything needed to cure and notice of the right to sue, before the declaration is recorded, to contest the forfeiture or ask for a court-ordered sale instead.

Both notices go to each buyer last known to the seller and to the last holder of record of a buyer's interest, and failure to comply in any material respect renders any purported forfeiture void. RCW 61.30.040(1). Not voidable. Void. They also go to record holders of interests and liens claiming through the buyer and to every occupant whose identity is reasonably discoverable, and the forfeiture is void as to anyone in those groups who is missed. RCW 61.30.040(2). A tenant in the basement and a contractor with a recorded lien both belong on that list.

When it was done wrong

A recorded, sworn declaration is prima facie evidence of compliance and conclusive in favor of good faith purchasers for value, except as to those notice failures. RCW 61.30.100(1). So a defective forfeiture can still pass good title to a stranger, and a buyer who was never properly noticed cannot sit on it. A seller who catches his own defect in time can supersede the bad notice and start over. RCW 61.30.080. One who records a declaration knowing of a material failure to comply can owe damages and fees. RCW 61.30.150(2).

If a notice of intent has arrived and you are the buyer, what can you do?

Cure first. Everyone entitled to the notices, whether or not they received them, plus any guarantor or surety, may cure the default at any time before the time for cure expires, and a timely tender reinstates the contract. RCW 61.30.090(2) and (4). Acceleration does not raise the price: the seller cannot demand accelerated payments as the condition of curing, beyond what would have come due anyway. RCW 61.30.090(1).

Stopping it in court

A person entitled to cure may sue to restrain the forfeiture, but the summons and complaint must be filed and served before the declaration is recorded, and filing does not by itself extend the time for cure. RCW 61.30.110(2). A permanent injunction requires proof that there is no default as claimed, or that the buyer has a claim excusing it, including by offset, or that there is any material noncompliance with the chapter. RCW 61.30.110(3).

A sale instead of a forfeiture

This is the answer to a forfeiture that would hand the seller a windfall. Any person entitled to cure may ask the court, again before the declaration is recorded, to order a public sale instead, and only on finding that the property's then fair market value substantially exceeds the obligations the contract secures and any senior liens. RCW 61.30.120(1) through (3). The surplus over the costs of sale and what the court awards the seller goes to the clerk. RCW 61.30.120(6). The buyer's equity, which a forfeiture would have extinguished, comes out the other end.

After the declaration is recorded

What is left is an action to set the forfeiture aside, open only to a person entitled to the notices and only if filed and served within sixty days. RCW 61.30.140(2). It fails unless good faith purchasers for value would be unaffected and the buyer establishes that the seller was not entitled to forfeit, or did not materially comply. RCW 61.30.140(4).

What happens on a note and a deed of trust, and can you collect the shortfall?

A nonjudicial foreclosure is a different animal on a longer fuse. It opens with a written notice of default, sent to the borrower and grantor at least thirty days before the notice of sale is recorded, itemizing the arrears and stating the total needed to reinstate. RCW 61.24.030(8). The notice of trustee's sale is then recorded, mailed and published at least ninety days before the sale. The borrower can reinstate up to eleven days before the sale date, and no sale may happen less than a hundred and ninety days from the date of default. RCW 61.24.040.

The hinge

Except as that section permits for deeds of trust securing commercial loans, a deficiency judgment shall not be obtained on the obligations secured by a deed of trust against any borrower, grantor, or guarantor after a trustee's sale. RCW 61.24.100(1). A commercial loan is one not made primarily for personal, family, or household purposes, RCW 61.24.005(6), and paper you carried on somebody's house is not that. Foreclose nonjudicially on a home for less than the balance and the shortfall is gone.

The bar attaches to the nonjudicial route, not to the instrument: the chapter does not preclude foreclosing a deed of trust in the same manner as a real property mortgage, and the deficiency section expressly does not apply to that. RCW 61.24.100(8). What a judicial foreclosure involves belongs to a different chapter and is outside this article.

Forfeiture ends in the same place, with no claim for the unpaid price once the declaration is recorded, RCW 61.30.100(4), and a court-ordered sale in lieu ends it too, regardless of what the property brings. RCW 61.30.120(9). But a contract seller is not confined to forfeiture: at his option the contract may be foreclosed in the manner applicable to a mortgage, which is not a forfeiture under the chapter at all. RCW 61.30.020(1) and RCW 61.30.010(4). What he cannot do is run both at once. RCW 61.30.020(2).

So which should a seller want?

That depends on facts no article can supply, so ask before closing rather than after a default. How much is being paid down, against what the property is worth now? Does the buyer have other assets worth a judgment? Will it be the buyer's home, which closes off the commercial-loan exceptions entirely? And does the contract carry a forfeiture clause, and will it be recorded, since RCW 61.30.030 requires both?

Does carrying paper on a house make you a lender?

There is a federal layer here and a Washington layer, and the Washington one is where sellers get caught. The intuition almost everyone arrives with, that an occasional private sale is obviously outside lending regulation, is not what the licensing text says.

The federal layer

Regulation Z defines a loan originator to include a person who, for compensation or other monetary gain, offers, arranges, negotiates, or otherwise obtains or makes consumer credit for another person. 12 CFR 1026.36(a)(1)(i). It excludes seller financers meeting either of two narrow tests: 12 CFR 1026.36(a)(4), for three or fewer properties in any twelve-month period, each owned by the person and securing the financing, open to any person; and 12 CFR 1026.36(a)(5), for one property, open only to a natural person, an estate, or a trust.

Each is a checklist rather than a category, and the conditions are about the paper: whether and how the loan amortizes, whether the rate is fixed or adjusts, whether a good faith ability-to-repay determination is required, and whether the seller built the residence. The two lists are not identical, and they differ exactly where a seller would assume they do not. Treat that as a map and not as the regulation, and check it word by word before anyone signs.

Washington has no general seller-financing exemption

The chapter that does the work is the Consumer Loan Act, chapter 31.04 RCW, and it starts from the opposite end: no person may engage in any activity subject to the chapter without first obtaining and maintaining a license. RCW 31.04.035(1). The implementing rule requires one, absent an exemption, to lend money or extend credit to Washington residents, and carries no general exclusion for a one-off or occasional lender. WAC 208-620-230(1). The Mortgage Broker Practices Act reaches the same conduct through its loan-originator definition rather than its broker one, covering an individual who, for direct or indirect compensation or gain, offers or negotiates terms of a residential mortgage loan. RCW 19.146.010(11)(a). A seller who proposes the rate and the repayment schedule is doing that.

What decides whether any of it is engaged is the buyer's purpose rather than the collateral. A residential mortgage loan is one primarily for personal, family, or household use secured by a dwelling or residential real estate. RCW 31.04.015(24). Financing an investment purchase is not automatically a residential mortgage loan just because the security is a house.

The exemptions that exist are about where you lived

Two matter to a seller, and they are worded differently. At the company level the rule exempts individuals who extend credit on the sale of their primary dwelling. WAC 208-620-104(7). At the individual level it covers one who offers or negotiates terms of a loan secured by a dwelling that served as the individual's residence, and the Mortgage Broker Practices Act rule uses the same words. WAC 208-620-105(3); WAC 208-660-008(2)(b). A primary dwelling and a dwelling that served as the individual's residence are not the same phrase, and not interchangeable.

Which is why the rental is the hard case. Carrying paper on a house you own and have never lived in answers to neither description on its face, and the licensing text supplies no separate exemption for it. That is the deal a great many owner-carry sellers are doing.

The five-or-fewer rule is two different things

Most sellers have heard that a few loans are fine. Two provisions sit behind that and neither says what people think. The statutory exemption for five or fewer transactions in a calendar year applies to financing the sale of property you own that does not contain a dwelling, and is unavailable to anyone subject to the federal SAFE Act or in the business of building residences. RCW 31.04.025(4)(f). The residential version is a waiver rather than an exemption, for five or fewer residential mortgage loans in a year without a company-level license, and it must be applied for and obtained for each transaction. WAC 208-620-232.

Choosing a real estate contract instead of a note and deed of trust is not a verified way around this. The definition reaches a consensual security interest on a dwelling, RCW 31.04.015(24), while the chapter separately defines a loan as money lent at interest or for a fee and making a loan as advancing or committing to advance funds, RCW 31.04.015(14) and (16), leaving a seller who retains title room to argue the deal is a deferred purchase price. No controlling Washington appellate decision on the current licensing provisions was located, on that question or generally.

None of this tells you that you are exempt, or that you need a license. That turns on your own facts, and the burden of proving an exemption sits on the person claiming it. RCW 31.04.025(6). An unlicensed and unexempt person also cannot sue to collect compensation in connection with a residential mortgage loan. RCW 19.146.200(2). It is a question to settle before you carry paper, not after.

Where this goes wrong

The contract was never recorded. Recording it, or a memorandum, in each county the property sits in is a condition to forfeiture. RCW 61.30.030(1). A seller who skipped that at closing does not have the remedy the instrument was chosen for.

The notice went to the buyer and nobody else. Occupants and lienholders of record claiming through the buyer are entitled to it, and the forfeiture is void as to anyone missed. RCW 61.30.040(2).

The buyer waited for the declaration. An action to restrain a forfeiture must be filed and served before the declaration is recorded; after that the only route is the sixty-day action to set it aside. RCW 61.30.110(2) and RCW 61.30.140.

The seller forfeited a property worth far more than the debt. That is the fact pattern RCW 61.30.120 exists for, and a buyer who sees it in time can convert the forfeiture into a sale.

The seller foreclosed nonjudicially and then went looking for the shortfall. On residential paper, RCW 61.24.100(1) closes that door the moment the trustee's sale completes.

Nobody asked the licensing question until the second or third carryback. The residence-based exemptions turn on a house the seller lived in, and a rental is a different case. WAC 208-620-104(7); WAC 208-620-105(3).

What a lawyer does here

Most of this is reading, counting and sequencing. Which instrument is actually of record. Whether the conditions in RCW 61.30.030 are met before a notice goes out. Who is entitled to the notices, which means a title search rather than a recollection of who was at closing. Whether the cure date runs ninety days from recording rather than from mailing. On the deed of trust side, whether the notice of default, the notice of sale and the hundred and ninety days from default line up on one calendar. From the buyer's side it is the same calendar in reverse, plus the valuation question that decides whether the answer is a cure, an injunction, a sale in lieu, or an action to set a completed forfeiture aside. Before a deal closes it is the licensing question, cheap to look at then and expensive later.

I take both sides of these, and a forfeiture done badly is a problem for the seller who conducted it as much as for the buyer who received it. Real estate is the largest part of my practice. I am an independent attorney in downtown Spokane, admitted in Washington, WSBA #55307, and Oregon, OSB #242384, handling contract forfeitures and foreclosures, owner-carry disputes, title review and quiet title litigation across Washington. If your question is still the purchase and sale agreement rather than the paper that came after, I wrote separately about what you are actually signing in Buying and Selling Property in Washington.

If you carried the paper and the payments stopped

The dates are the case, which is why an early conversation is worth more than a thorough one later. I offer a free initial consultation by appointment at my downtown Spokane office, 601 W. 1st Ave., Suite 1400. Bring the contract or the note and deed of trust, a payment history, and any notice that has gone out or arrived.

Disclaimer

This article is general information about Washington law, not legal advice, and reading it does not create an attorney-client relationship. Law changes, and how it applies depends on facts specific to your situation. If you have a question about your own circumstances, speak with a lawyer.