SELLER / OWNER FINANCING
Seller financing is a way which you could use to bypass the middle man and have a smooth business transaction.
It is not often as easy to get financial backing. If you are a home buyer who needs extra cash to buy a new home or a home seller who needs extra money to repair and refurbish your home before selling. Things might get a little bit more complicated for buyers, as getting a mortgage might be a lot more complex especially if the financial situation is not the best, with a predictable salary, a stable employment history and most importantly a perfect credit score.
Seller financing is a way that you could use to bypass the middle man and have a smooth business transaction. Seller financing occurs when the buyer of a house gets a loan from the person selling the house. Another name for it is owner financing.
Here’s how it works:
Just like the way it sounds instead of the bank financing the loan, the seller takes this role. Both parties agree on the interest rate, repayment plan, and actions to be taken if the deal is not held up. Most of these kinds of arrangements are often short term and include a balloon payment at the end of the agreed time. As with business, nothing is always 100% successful, so arrangements such as this may end up as a total disaster.
Seller financing arrangements occur more in real estate markets where loans are generally very difficult to secure. If loans are easy to get and the buyer doesn’t have the ability to secure a loan, then the seller would be skeptical on the buyer’s ability to pay back. Seller financing is still very uncommon primarily because people who want to sell their homes can be in great need of the money even before trying to sell their homes. Many homeowners are not aware of a great financial “trick” they can use when selling their home with “seller-financing”; when the deal is concluded it is possible to sell the note to a 3rd party and get the cash right away. Then the buyer has to make payments to the new owner of the note.
A seller may choose to go ahead with seller financing for several reasons, such as:
Trying to make their property sell fast and stand out especially in a not-so-good market.
Trying to get the exact amount of money they wish to sell the property for, or even higher.
In need to pay a debt.
Trying to get rid of the property’s monthly expenses.
Here are a few advantages to seller/owner financing for both buyers and sellers.
For buyers:
The process of closing the deal can be a lot faster as there is no need to wait for bank loan officers or other third parties to participate in the deal.
Buyers can move into the house with much less money required to put down.
The down payment amount can be whatever the buyer and seller agree on and most of the time, it would definitely be lower as compared to that of government-mandated down payments.
Closing costs are lower the buyer does not have to pay the bank fees and appraisal costs.
To sellers:
The buyers most often pay higher interest rates as compared to getting the loan from a bank or a financial institution.
The buyer would try to gain the trust of the seller, especially if they do not qualify for a loan. And they might go out of their way to gain that trust.
The seller has the ability to resell the promissory note to anyone of their choice and get cash.
It is clear to see that in some situations seller financing is a win-win situation for both parties.
Owner Financing – types of arrangements
Land contract
In a land contract the buyer does not get the deed, instead the buyer gets an “equitable title” which means that if the property goes up in value the buyer will enjoy the benefit, but the property does not belong to the buyer until the buyer makes the last payment and only then the buyer gets the deed.
Lease option
In the lease option, the buyer typically pays some sort of upfront fee for the option to buy the property some time in the future. The buyer is not obligated to buy the property but the buyer has the option if he or she wants to do that after a cretin amount of time. Usually, in lease option contracts, some or all of the rental monthly payments are credited against the purchase price of the property.
Assumable mortgage
The buyer takes the responsibility to pay the seller’s existing mortgage with the bank’s approval. Some FHA, VA, and conventional loans are assumable.
All inclusive mortgage.
In an all-inclusive mortgage, the seller takes the mortgage and carries the promissory note of the entire purchase price less any down payment.
Junior mortgage.
The seller can carry a second mortgage from the buyer (a junior mortgage). In this case, the seller’s mortgage will have second priority if the buyer defaults. In case the buyer defaults the first mortgage holder will have the right to take possession of the property and the seller will get his proceeds from the sale only if there is enough to cover the first mortgage debt. In addition, the bank may choose not to give the first mortgage to the buyer since he carries too much debt.
How to reduce the seller’s risk?
A lot of sellers are afraid to finance the purchase of their house and that is because they are worried that the buyer will default. Hiring professionals can help you reduce the risk involving in a Seller Financing transaction or Alternative Payment Options:
Ask for loan application.
Asking for loan applications can help you a lot when it comes to taking the decision whether to finance your house to a specific buyer. You should ask the buyer to fill out a loan application (just like the bank would ask a customer). It is your responsibility as the seller to check and verify all the information provided by the buyer, run credit inquiry, verify employment, financial claims and other background information
Secure the loan with the property.
In case the buyer defaults the seller can foreclose on the property the loan has to be secured by the property. As the seller, you should have the house apprised to make sure the house is worth at least the purchase price.
Ask for a down payment
Like other lenders, you need your buyer to have some “skin in the game” in order to protect your investment. Ask for at least 10% as a down payment. It will also make your buyer more committed to the loan and payments now when they have something to lose. If you don’t ask for a down payment you might end up with a house that is worthless after all the legal expenses in the event of a foreclosure.
Make it happen!
If you think that seller Financing is the right choice for you, how do you make it happen?
Make it clear in your advertisement.
When you put the house on the market, just note in the listing that “Owner Financing is Available”. That will make the agents and buyers aware of the special offer you put on the table. Some buyers use filters to find out which deals are available with seller financing. Without proper specification in the listing, you might lose many potential buyers.
Present the information in your home.
When buyers view your home you can add an information sheet explaining what is seller financing (since many buyers are not aware of that option). Make sure to describe in detail your terms for the deal.
Get Professional help
Get an attorney to prepare the contract for the sale of the property, the promissory note and all other paperwork related to the transaction. When using Seller Financing there could be complications with reporting the taxes on deals of that nature. You might consider hiring a tax expert for advice so you would know you are not making any mistakes with the authorities.
In Conclusion…
There are many creative ways to sell your house fast.
You can still sell your house quickly in South Florida, even if lenders aren’t approving buyers easily. It might be that seller financing is the perfect solution for you. It is important to do it right and to consult with professionals in order to avoid critical mistakes. We at BiggerEquity can help you with Owner/Seller Financing. If you have a question feel free to contact us by filling out the form on this page either call us at (866) 333-8377.