Is Seller Financing A Good Idea?
If you’re a homeowner who has paid off 90% or more of your mortgage and have a lot of equity built up in your home or other properties, you may be looking to sell. You know how buying and selling works, as you’ve owned for over ten years. Now, you are looking to maximize the return on all the time and money you have invested in your property. You have probably heard of seller financing. It may sound a little intimidating, but it is also intriguing, and you want to know more.
What is seller financing?
Seller financing is also known as owner financing or a purchase-money mortgage. It is when the seller acts as a mortgage lender for the buyer. Instead of going through a bank or a professional lender, the buyer makes a deal with you in order to buy your property.
Reaping the benefits
There are many different types of seller financing. Most of them consist of becoming the mortgage lender yourself for a specified amount of time, and then receiving a balloon payment after a few years. You may find the monthly cash flow streaming into your account each month to be a nice perk. Some sellers find this monthly income more attractive than a lump-sum, especially since the buyer is paying you interest on top of the purchase price.
Another benefit of seller financing is that it helps you sell your home at its asking price. Let’s say that you want to make $210,000 on your property, but most houses in your area with similar specifications are going for around $200,000 after negotiations. You could offer to finance your buyer’s mortgage for 0% interest. Of course, this is provided that they agree to pay the full $210,000. Another way to get a top price on your home is a seller financing 50/50 agreement. This is where the buyer promises to pay 50% of the cost of the house at closing and then pays the other 50% at a later date. It could be two, five, or ten years later, but as the seller, you can decide how you want to proceed.
Seller financing is especially popular at times when banks are feeling risk-adverse and properties are harder to sell. It can be an appealing option for owners looking to make a quick sale. Closing takes a lot less time than going through the normal channels–sometimes within a week! This is because you won’t have to deal with as much paperwork and bureaucracy.
Seller financing legality
According to the Dodd-Frank Act, a mortgage originator is anyone who gains compensation in any way from taking a residential mortgage loan application, or who offers a residential mortgage loan. This law refers to licensed mortgage brokers. But you, as the seller, are allowed to seller finance your property under certain exceptions. Click here to read a list of those exceptions and see if they apply to you. Seller financing does not apply to rental properties, vacant land, commercial, or corporate properties, etc. It is for homebuyers looking to live in the home(s) you are selling.
It is worth noting that different states have different laws regarding seller financing. You should talk with a tax advisor to find out more about how this type of loan is taxed.
What if the buyer stops paying?
It is very important that your buyer demonstrate their ability to pay back their mortgage loan. Both you and your buyer should hire real estate attorneys in order to draft all the relevant paperwork. They will also make sure you have ticked all the boxes.
Essentially, you, as the seller, will secure your loan by putting a lien against the property. If the buyer doesn’t pay back the loan, this lien gives you the right to foreclose on the buyer. You can then take back the property. At that point, the house is now yours once again, exactly as it has been left. You are now free to resell the home in whatever capacity you so choose.
As a seller, is seller financing a good deal?
That all depends on the market, your ability to sell quickly, and if you’re looking to make a little profit or if you desperately want to sell your home at its top value. There are definite pros and cons to seller financing, but it’s worth researching and talking to a licensed real-estate professional.
If you are interested in selling, contact us now and we can help you decide if seller financing is right for you!