If you are selling real estate and working with a real estate broker or are approached by a real estate investor you may be offered seller Financing as part of an offer for your real Estate. In response you may ask, what is seller Financing? This is a typical response as seller financing is typically not part of the discussion with most real estate agents, but it may be more common if you are working with professionals or investors who understand all options and alternatives that may deliver a win for both a buyer and a seller. Attorney Richard Symmes discussed seller financing on 1150am KKNW and you can listen to that segment here:
How Does Seller Financing Work?
In a typical real estate transaction that involves financing, a buyer obtains a mortgage loan from a bank or lender and uses the loan to purchase a home and then makes payments on the mortgage until it is paid off, typically over a 30-year term. In Washington state, a promissory note is signed to pay back the loan in addition to interest and then a deed of trust is recorded against the property to secure the note in case there is a default on the part of a borrower.
With seller financing, a note and deed of trust are signed in favor of the seller of the real estate based on terms negotiated by the parties. Often times this can include a balloon payment on a shorter term to allow a buyer to obtain more of a traditional mortgage over time.
Why should I consider Seller Financing?
Seller financing can allow for a seller to get a higher selling price and earn interest which can be at a higher rate than if the funds from a sale were invested. A typical interest rate may be between 10-12%. If you have tried to sell your real estate the traditional way and are not getting your price, then perhaps a buyer will come along who due to one reason or another does not qualify for a traditional mortgage to finance your property but wants to purchase it.
If your options are accepting a lower priced offer or you don’t have any offers and you don’t need the sale proceeds immediately, seller financing could be an option for you.
Why should I avoid Seller Financing?
With seller financing you would not receive the full sale proceeds from your property right away, so if you need the proceeds to purchase a new property or for other reasons, seller financing is not for you.
Additionally, you should only be considering seller financing an option if you own your property outright or a lump sum is being provided (perhaps through a first mortgage) to pay off the existing mortgage as part of the deal. In any case you should make sure that your note and deed of trust are protected and make sure you are not loaning out more than 70 – 75% of a property’s value (loan to value) and consider if there are any other mortgages or liens on the property. This is to make sure that if you need to foreclose on your note and deed of trust due to nonpayment, you will be paid back in full. You also need to consider any market shifts and the value of the property to leave some cushion for costs and unforeseen circumstances that could arise.
You should also avoid seller financing if you do not want to be the bank although there are companies who can assist with collecting payments and keeping records for a fee.
Finally, if there was a default by the buyer, you would have to hire an attorney to foreclose on the note and deed of trust in order to take back your property. You may have claims against the buyers as well for non-payment and interest, but it could be a hassle to go through this process if things don’t go according to plan.
What Should I consider When Review a Seller Financed Option?
When considering an offer that includes seller financing as it relates to real estate you need to think about why is the buyer making you a seller financed offer as opposed to obtaining a more traditional loan like most buyers do. You need to find out what this reason is and consider it as part of the offer. A common reason is that for one reason or another a buyer cannot obtain the loan they want which could be due to bad credit or perhaps they are an investor and can only borrower so much at a time. Bottom line is you should obtain a credit report and financial of any potential buyers and if it’s a business making the offer a personal guarantee is recommended.
You should also consider the length of time that you want to play the role of the bank and when a balloon payment should be due. Most sellers will want the full sales proceeds as soon as possible.
Finally, you should consider your tolerance for risk and ability to cover costs should things not go according to plan which includes hiring an attorney to foreclose on the property and collect any deficiency against buyers.