Seller financing sours the deal

Home Sale Hindsight

By Inman News Feed
Add Comment Add Comment | Comments: 1 | Posted Oct. 22, 2010

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Home Sale Hindsight

Tara-Nicholle Nelson
Inman News

Q: I was looking to buy a cheap second home. The only terms the seller would accept were cash and conventional. I offered $10,000 down, with $500 per month for five years. The asking price was $34,000 and the home had been on the market for more than 1,800 days. My offer was turned down. Why?

A: My mental x-ray machine -- you know, the one that allows me to read people's minds -- is in the shop, so I can't answer the question of why the seller turned your offer down 100 percent definitively. But I can sure take a stab at it. Here goes!

Apparently, the property's MLS listing specified that the seller would take only cash or conventionally financed offers. This is an increasingly common thing to see, as sellers seek to avoid some of the common transactional glitches associated with nonconventional mortgage financing (e.g., FHA and VA loans) that cause deals to fall apart.

No seller wants to be put in the position to have to put their home back on the market because the property didn't appraise at the purchase price, didn't meet the lender's condition guidelines, or the homeowners association had "issues" like a too-high rate of delinquent dues or non-owner-occupied units.

So, when the seller or their agent knows the property has issues that will prevent an FHA-insured loan from closing, the seller often avoids the drama entirely by refusing to even look at offers financed other than with cash or conventional financing.

Your offer was for $44,000 in total, but it was neither cash nor conventional. What you offered was a seller-financed purchase, where you would essentially pay $10,000 in interest over the five years of the loan -- not a particularly high rate of interest for seller financing, which does usually command a premium interest rate and/or price.

So, the long and the short of it is that the seller very likely rejected your offer because it was neither a cash nor a conventionally financed offer.

The seller could have rejected seller financing because they currently have a mortgage that contains a due-on-sale clause, which requires that they pay the mortgage off when they sell the home, and your $10,000 down doesn't pay the mortgage off.

The seller might have declined to do seller financing because the seller simply needed the cash proceeds from the property's sale as soon as possible.

The seller may also want the closure that comes from totally divesting the property; and the seller may not want the monthly rigmarole of collecting payments from you, worrying about whether you'll pay or not, and the ongoing drama that could very likely arise if you don't pay.

Fact is, the owner probably thinks, "Geesh. If this buyer wants the place bad enough, has 10 grand, and can truly afford to consistently pay $500 per month on this place, the buyer should just go out and get a conventional loan, so I can get my cash now!

Here's the deal: This week, a 15-year fixed, conventional, conforming mortgage with a loan amount of $24,000 would run you a payment of about $172 per month -- that's if you decided to pay it for 15 years. If you went ahead and paid the mortgage company the same $500 monthly payment you proposed to the seller, you would save yourself thousands of dollars in interest and pay the place off in closer to five years than 15.

Of course, on a second home, the downpayment requirements are heightened -- often around 25-30 percent right now. But hey, you were offering to put $10,000 down, which is nearly that 30 percent! Of course, your closing costs, etc., will be quite a bit higher, given the mortgage financing.

So, my suggestion would be to go out, get approved for a loan to buy the place, and make the seller another offer at a lower purchase price to offset your closing costs.

As long as it's been on the market, the seller would probably prefer to get a slightly lower purchase price, especially since seller will be getting it in full at the time escrow closes.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

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1. Rob Aubrey said... on Nov 1, 2010 at 06:34AM

“I would like to add

In today's lending climate seller's are not getting the serious bump in interest rates like days gone by.

Seller finance is now a benefit to the seller.

The other thing, if the buyer and seller are concerned about the due on sale clause, than they should just do a contract for deed or a lease option.”

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