Seller Financing
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Seller Financing
Seller Financing
by
Robert Irwin
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Today most sellers expect buyers to pay cash. The reason, of course, is that great institutional financing is so readily available. Sellers expect that buyers will go to a mortgage broker and arrange all their financing so that when the offer comes in, it's "cash to the seller," even though it's financing to the buyer.
Unfortunately, demanding cash offers overlooks an opportunity that could benefit sellers who have large equity positions - financing the sale themselves.
There are two potentially big benefits (as well as some perils) with seller financing. The first is finding a buyer who might pay a bit more for a home that's harder to sell. Offering seller financing sometimes means that a buyer who might not be quite credit worthy enough to get an institutional loan, will be able to buy your home. Such a buyer, in exchange for seller help with the financing, may be willing to pay more and accept a slightly higher interest rate. (Of course, such a buyer is probably at greater risk of defaulting on the loan, which is one of the perils for the seller.)
Secondly, sellers with larger equities can often get a higher interest rate on their money through offering a mortgage to buyers, than if they sold and stuck their money in a bank. Consider, if you have $100,000 in equity, sell your home and bank that money, at today's rates you'll be lucky to get 2 percent interest. On the other hand, offer financing to the buyer in the form of a mortgage and you may get 5.5 to 7 percent interest.
Converting equity to a high interest rate bearing mortgage is particularly appealing to more mature sellers who need the money for retirement purposes. Unfortunately, these are the same people who are most vulnerable should the buyer be unable or unwilling to make payments.
WHAT IS SELLER FINANCING?
Most seller financing involves giving the buyer either a first or second mortgage. (The order of the mortgage determines its risk, with a second mortgage riskier than a first, hence usually commanding a higher interest rate.)
The challenges of seller financing come in three areas:
- Qualifying the buyers (to be sure they can make the payments)
- Obtaining documents to create the financing
- Protecting against loss of all or part of the equity invested, if the buyer defaults.
Qualifying buyers these days is made simpler through the ready availability of free credit scores to borrowers, who can then show them to sellers to woo their financing. (Of course, it's always a good idea to have your attorney check over any documents before using them.)
Unfortunately, sometimes buyers do default and then the usual remedy to sellers is foreclosure. This, however, can be a difficult and expensive process, the fear of which often keeps sellers from offering financing.
Seller financing remains a potentially lucrative, but also risky, venture. Consulting a financial planner and an attorney is suggested.
TIP - Seller financing used to be called "creative" financing and was given a bad rap when it was abused by unscrupulous buyers who would purchase a property for nothing down with the seller handling the financing, put in tenants, take the rent, and then walk away. While most sellers are no longer so naive as to fall into this trap, it's still a good idea to be wary of it.
Robert Irwin is the most prolific real estate writer in America having produced over 100 published books in the field. His
TIPS & TRAPS McGraw-Hill series has sold well over a million copies and his
FOR SALE BY OWNER KIT and
FIND IT, BUY IT, FIX IT and other books have been strong sellers for Dearborn.
In addition Irwin writes a regular real estate column for The Wall Street Journal online and is introducing a new weekly column for Owners.com.
Irwin has sold his own property "by owner" and during over 30 years in the business has been a broker and consultant to lenders, agents, buyers and sellers.
He can be reached through his website RobertIrwin.com.
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