Is Seller Financing Right for You?

Seller financing can be a win-win situation for both the buyer and seller in a real-estate transaction.  As long as the contract is legal and both sides honor their obligations, both parties will find that seller financing is much less costly than traditional financing methods. 

In most cases, there is no need for a traditional closing, unless the buyer is using proceeds from a mortgage loan to cover some of the home’s purchase price in addition to the seller financing.

The Seller
For the seller, offering seller financing is a great way to attract buyers when the market is slow and interest rates on traditional mortgage loans are high.  This is because every shopper likes a bargain, and homebuyers are no exception.

Sellers also benefit when they extend financing to the buyer because, unlike in traditional sales arrangements, the seller – not the lending agency – collects the interest payments.

Entering into an agreement to provide seller financing may also provide tremendous tax relief for sellers who receive a large capital gain with the sale of their home.  Often seller-financed home sales are not subjected to the same tax laws.  Speak with a tax professional or real-estate attorney specializing in seller financing before you enter into this type of agreement for tax purposes.

Along with these advantages, seller financing presents a major risk to the seller.  If the contract is incomplete and the buyer defaults, the seller may be unable to pursue collection activities and foreclosure may be extremely difficult.

If you are considering seller financing as an option when selling your home, here are some things to consider:

Do You Need the Proceeds From the Sale of Your Home in Order to Purchase a New Home?
If the answer to this question is yes, then you should not extend seller financing to potential buyers.  However, if the answer is no, you might be able to sell your home quickly while assisting the buyer and generating long-term income from the finalized sale.

Are You Prepared to Thoroughly Investigate Potential Buyers?
Seller financing presents a certain level of risk for the seller. A buyer with less-than-perfect credit may be unable to obtain a traditional loan for your home, yet may be more than capable of making a down payment and meeting monthly payment obligations.  You need to perform a credit check by analyzing a buyer-provided credit report and check employment references, just as a traditional lender would do when deciding whether to provide financing.

Can you afford the Selling Costs?
Can you afford the costs associated with the sales transaction, including a real-estate attorney, market value appraisal, and more?  If the answer to this question is no, then you may want to ask the buyer to cover some of these costs.  Usually the buyer will be more than willing to pay a portion of your costs.  However, if your answer to that question is yes, then you are well on your way to proving seller financing for your buyer.

Once you, as a seller, have thoroughly investigated the buyer, it is time to contact a real-estate attorney to create a legally-binding contract between yourself and the buyer.  Although there are plenty of resources for drawing up your own contract, without the advice and expertise of a real estate attorney you are taking a risk that the contract you sign is not legally binding.  This may present problems with the title transfer, local taxing authorities, and more.  Therefore, you at least need to consult with a local attorney for assistance.

The Buyer
As stated above, seller financing can provide significant savings and advantages for both parties in a real-estate transaction.

Seller Financing
If you have blemished credit, or even terrible credit, seller financing may enable you to purchase a home that you can afford now, regardless of what may have happened in your past.  By entering into a seller-financing situation, you will probably not need to provide as much cash up-front. 

Additionally, seller financing does not require the same type of application that a traditional lender does.  If you are newly self-employed, obtaining a traditional mortgage loan may be next to impossible, or the interest rates and down-payment requirements may be quite substantial.  With seller financing, you are in the position to buy the home you want while holding on to some of your savings.

For a seller to participate in a seller-financing agreement there cannot be any outstanding liens on the property.  Check with the local taxing authority to ensure that all property taxes have been paid in full, and ask the seller to show you an official copy of the home’s title. 

If you are unable to arrange traditional financing to cover the entire cost of the home, it is possible to obtain a mortgage loan for some portion of the home’s cost while using seller financing to cover the remaining cost.  Sellers who are willing to offer seller financing to potential buyers face less risk when you use a traditional mortgage to satisfy a portion of the home’s sale price. 

Keep in mind that when you borrow a traditional mortgage and also use seller financing, you will need to make payments to both your lender and the seller.  In most cases, you will be paying interest on both types of financing.  Pay close attention to how much total interest you are paying, because normally you can deduct it from your income taxes.

When you want to find a home with seller financing, ask your real estate agent for help. Most agents can search homes currently listed on the multiple listing service (MLS) and narrow down the list of potential properties to those that might be eligible for seller financing.

A home has been vacant and for sale for an extended period of time may be a sign that buyers are unable to attain the necessary financing to purchase the home.  Have your agent contact the home’s listing agent to find out whether the seller is willing to provide seller financing.

Conclusion
Seller financing is a great way for sellers to generate consistent long-term income when they sell their home.  It also allows the buyer to avoid the lengthy application process common for traditional financing methods.

Before entering into any sort of seller-financing agreement, the seller needs to meet with at least a real-estate attorney to prepare the sales agreement.

Although traditional financing methods are probably not part of the sale process, it is important to pay the listing agent and the buyer’s agent a fair commission for their assistance in the sales transaction.  If either or both parties enter into a seller-financed sales agreement without the support of an agent, it is still acceptable to call in an attorney during any step of the process.

An experienced realtor can provide you with general information about seller financing. However, realtors may not be as knowledgeable about these non-traditional methods as they are about fixed-rate and adjustable-rate mortgages.  Nevertheless, a good realtor will use his or her experience and expertise to help you arrange a beneficial seller-financing agreement.

If you know another buyer or seller who has participated in a seller-financing agreement, ask about his or her experiences in order to understand this type of sale more fully.

Whether you are the seller or the buyer, consider the risks and advantages of seller financing before determining whether or not to enter into a seller-financing agreement.