Seller Financing

Some sellers – especially older folks looking for dependable monthly income – don’t necessarily want to be cashed out of a small rental property they’ve held for years.

For example, Kenny Graham, 63, received an offer to sell his home from the son of a former college teammate. Graham, divorced with no children, planned to spend a majority of the sales proceeds on a new place in Puerto Vallarta, Mexico. “The buyer gave me my price,’’ Graham said. “But he wanted me to take his terms. Under the circumstances, it sounded like a good deal to me. He wants me to carry the paper for a few years, and I’m able to move on my schedule. Instead of buying in Mexico, I’ll just go down there and rent and wait to find something I really want to buy.’’

“Carrying back” all or a portion of the proceeds can make a lot of sense. Most of the time, seller financing works well for both sides, but both sides – especially the seller – should be prepared to handle the deal much like a small business. While the buyer can simply mail you a check every month, it’s up to you to craft the ground rules.

If you participate in any sort of seller financing, make sure to build in safety features that protect your investment and sanity. In fact, it’s not a bad idea to copy many of the loan requirements a local bank would insist upon – especially if you will be out of the country most of the year.

 

Here are some seller-financing tips to consider:

• It's a good idea to obtain a credit report on the buyer. Why would you want to sell your home or other property to someone you know nothing about?
• Write into the earnest money agreement that the buyer provides, and keeps current, a homeowner’s insurance policy.
• Purchase tax registration coverage from a title company. That way, if the property taxes are not paid, you will be notified. Include in the earnest money that the buyer make timely tax payments.
• Insist on a "due on sale" clause or that you, as the initial seller, must approve any subsequent sale in writing. That way, if the property is sold before the term of your note or contract, you will receive all your cash upon the transfer of the property, or retain the ability to approve the new buyer.
• If you absolutely cannot be cashed out early (say you need monthly income or do not want to pay taxes on the lump-sum gain) request a prepayment penalty. That way, if you receive a huge balloon payment when you don’t necessarily want it, you will be reimbursed for the inconvenience (tax consequences, loss of reliable income, etc.).
• Consider taking a downpayment of at least 20%. If you need to sell the note before term (illness or other emergency) this will make it easier to sell. Like regular mortgages, lenders require mortgage insurance for loans they write with less than 20% down. You will reduce the risk of any future note holder by having an amount at least equal to a conventional down payment.
• Consider a third-party collection account. You can split the cost (about $60 a year) with the buyer, and the service is well worth the money. It provides you with complete tax statements (seller must submit principal and interest amounts to the buyer-payer annually) and receives and deposits monthly payments – especially valuable if you have to go out of town unexpectedly.

When honest, competent parties are involved, seller financing via a real-estate contract or deed of trust can be a wonderful vehicle for buying and selling property.

Here are some seller-financing tips to consider:

• It's a good idea to obtain a credit report on the buyer. Why would you want to sell your home or other property to someone you know nothing about?
• Write into the earnest money agreement that the buyer provides, and keeps current, a homeowner’s insurance policy.
• Purchase tax registration coverage from a title company. That way, if the property taxes are not paid, you will be notified. Include in the earnest money that the buyer make timely tax payments.
• Insist on a "due on sale" clause or that you, as the initial seller, must approve any subsequent sale in writing. That way, if the property is sold before the term of your note or contract, you will receive all your cash upon the transfer of the property, or retain the ability to approve the new buyer.
• If you absolutely cannot be cashed out early (say you need monthly income or do not want to pay taxes on the lump-sum gain) request a prepayment penalty. That way, if you receive a huge balloon payment when you don’t necessarily want it, you will be reimbursed for the inconvenience (tax consequences, loss of reliable income, etc.).
• Consider taking a downpayment of at least 20%. If you need to sell the note before term (illness or other emergency) this will make it easier to sell. Like regular mortgages, lenders require mortgage insurance for loans they write with less than 20% down. You will reduce the risk of any future note holder by having an amount at least equal to a conventional down payment.
• Consider a third-party collection account. You can split the cost (about $60 a year) with the buyer, and the service is well worth the money. It provides you with complete tax statements (seller must submit principal and interest amounts to the buyer-payer annually) and receives and deposits monthly payments – especially valuable if you have to go out of town unexpectedly.

When honest, competent parties are involved, seller financing via a real-estate contract or deed of trust can be a wonderful vehicle for buying and selling property.

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One other tip I can add - if down the road you decide you need all your cash out, you can sell the contract, albeit at a 5% - 10% discount depending on the terms.  This includes, but is not limited to, the interest charged and the number of payments involved. 

As an observation, several people I have talked to that have provided seller financing,  have indicated they have sold the same piece of property 2 or more times.  The primary reason - the purchaser got behind on the payments and defaulted on the contract. 

Foreclosing is expensive, but there are alternatives to foreclosure such as the purchaser gives you back the deed in lieu of foreclosure.    If you have to go through the foreclosure route all the way to the auction, expenses will mount up.  Primarily attorney fees and advertising costs.   The good news is you can usually  make up many of these foreclosure costs on the down payment from the next sale. 

But like everything else in real estate - due diligence is required.

If you are considering selling and offering seller financing - give me a call and let's talk.