Seller Financing - An Attractive Option to Traditional Methods
By Asheesh Advani
Seller financing of residential real estate transactions has been around
for as long as properties have been bought and sold. In recent years,
however, we have seen a renaissance, as this age-old approach is
increasingly used in the disposition of residential properties purchased
for investment purposes.
In seller financing - also known as "owner financing" or "seller
carry-back" - the owner of a piece of property takes a promissory note
back on all or part of the sale price of a property. In effect, the
seller acts as the bank for the buyer. The promissory note is then
secured by a mortgage, allowing the seller to maintain a lien on the
property.
Seller financing is very often used by foreclosure investors - when
they're buying and when they're selling. Once the foreclosure auction
occurs, of course, seller financing is no longer an option. Up until that
point, however, the home owner is still the legal owner of the property,
and can sell to anyone (in any manner) - as long as his or her debts are
satisfied. In practice, this means that the existing mortgage would need
to be paid off, but some of the equity - either with small monthly
payments, a balloon payment once the property is sold, or an escalating
payment schedule - might very well be seller financed.
* Next 37 17 investors only!
What's in it for the buyer?
If you are the buyer, the benefits of seller financing are many. With the
steady rise in interest rates and property values in recent years, many
buyers have had to settle for less house than they wanted, or pass on
attractive investment properties. Seller financing, with its lower
closing costs and reduced initial investment, may allow you to purchase a
property that would have been out of reach with traditional financing.
In addition, if you have a poor or insufficient credit history, without
seller financing you could be kept out of the home or investment property
market entirely. Making regular payments via a seller financed mortgage,
on the other hand, allows you to get into the game, begin building equity,
and repair/build your credit history in the process.
What's in it for the seller?
For the seller, there are a number of advantages to financing the sale:
- It broadens the pool of potential buyers. There may be an otherwise
attractive buyer who is shut out of traditional financing markets due to
factors such as citizenship status, insufficient credit histories or lower
credit ratings. Also, the buyer may simply not have the substantial down
payment typically required.
In addition, a particular property may be unattractive to traditional
lenders and therefore difficult to finance. For example, it may need lots
of repair or be considered "too rural." By offering a financing
alternative in these situations, the seller increases the supply of
potential buyers. As a result, the property may sell faster and at a
higher price.
- It offers an alternative to leasing. Many sellers are seeking a steady
stream of income - either to avoid the tax impact of a lump sum payment or
for other reasons. In these cases, acting as the seller-financer can be
an excellent option. Interestingly, many investors we talk with report a
better monthly payment experience with owners than with renters regardless
of credit scores, even when down payments made by buyers are
insignificant. They also report that properties are better cared for by
owners than by renters.
Making it work
The greatest risk to the seller-financer of course, is that the buyer may
not make payments. And while the seller would still have a lien on the
property - and therefore the right to foreclose for nonpayment - it's in
nobody's interest for this worst case scenario to play out.
With that in mind, some suggestions for buyers to help keep things on
track.
- Help the seller to check you out. An experienced seller knows that many
individuals classified as "high risk" by traditional sources may in fact
be perfectly good lending risks. Others potential buyers, however,
deserve this designation as a result of their past history. Do whatever
you can to demonstrate to the seller-financer that you are a risk worth
taking. Be up front with information - both good and bad - and help the
seller to become comfortable with working with you.
- Pay on time and communicate immediately and honestly if you run into a
problem. It is never in your best interest to avoid or mislead the seller
if you can't make a payment. As with any relationship, honest, up-front
communication is the key to making it work.
With rising interest rates, rising prices and a more varied pool of
buyers, seller financing is a valuable strategy for all concerned.
Asheesh Advani, PhD, is founder and president of CircleLending, Inc., an
administrator of private loans with a special focus on residential
mortgages. CircleLending is based in Waltham, Massachusetts. For more
information, visit www.circlelending.com
or call 1-800-805-2472
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