A seller financing checklist

REThink Real Estate

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Mar. 29, 2012

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REThink Real Estate

Tara-Nicholle Nelson
Inman News®

Q: We own a vacation condo in Florida. Due to a new investor coming in and purchasing 51 out of 232 units in the complex, banks and mortgage companies in the area are no longer financing any units for fear that the investor may go "belly up" and default (which would basically kill the homeowners association).

My unit has been on the market for more than a year awaiting a cash buyer, to no avail. What is your thought on offering "partial seller financing" (e.g., financing 50 percent of the sale and requiring a 50 percent down payment)? --J. Getz

A: When a seller has not exhausted his or her basic options for getting a home sold, like simply reducing the list price to a level consistent with other recent sales, I'm generally inclined to discourage seller financing -- or at least to issue a series of cautions.

And frankly, most sellers on today's market are selling because they want to completely divest of a property and get closure on that stage of their lives -- and they need the cash from a sale to pay off the mortgage and move on with things.

Seller financing continues to keep the seller tied up with the property for the term of the financing he or she extends; and it comes with accounting obligations and the risk that the buyer/borrower will default, forcing the seller to incur the expense and trouble of foreclosing and reselling the property.

On the flip side, sellers who finance properties can sometimes charge a premium price for the property itself, and an above-market interest rate on the financing.

Also, if they collect a hefty down payment upfront, as you're proposing, that does two things: minimizes the risk that the buyer will default later and walk away from their investment, and turns what would be a loss for the seller (foreclosure on the property) into a potential profit, in cases where the seller is able to keep the down payment and the proceeds of reselling the home after foreclosing on it.

In your situation, there simply aren't too many marketing tactics or things you can do that are liable to lure a buyer by solving for the problem of mortgage lenders refusing to lend in that area -- except for seller financing.

And, to be honest, offering 50 percent seller financing might not even do it. Chances are, many buyers are aware of the issue and share the same (somewhat valid) concerns as the bank.

But you can't control what every buyer thinks; all you can control is what you do, and I think offering seller financing is an action strategy to explore.

As you do, here are three suggestions for your effort to use seller financing to get your place sold:

1. Act like a bank. Run a credit check, get references, and verify the home address and employment of a would-be buyer before you agree to lend to him or her.

If you are able to get the place sold, and the buyer begins making late payments, charge late fees and don't let months of excuses go by for missed payments before you begin the process of foreclosing on the home (unless you can well afford to forgo the payments and have some reason for coming to some sort of agreement with the buyers).

Many seller-financiers get friendly with their buyer-borrowers over time, but it's important not to let such relationships interfere with your own personal finances or put you in the hole.

2. Hire an attorney. Have a local attorney (ideally someone who practices real estate law and also has some background with title issues) take a look at your existing mortgage documents (if you have a mortgage) and advise you on how, logistically, to move forward with a seller-financed sale.

There are various ways to execute such a sale, and each way has a different set of rights and obligations on each side, not to mention the differing tax and other implications they pose. Consider also asking the attorney to draw up the documents and record them, as needed, depending on the route you choose.

3. Seller financing is not a panacea. Based on your description of the market factors in your area, it's entirely possible that you might still need to bring the price down or accept a down payment lower than 50 percent to get your vacation home sold.

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