Seller Financing: What Home Sellers Need To Know

Seller financing can be an attractive option for homeowners in the right situation. Seller financing can open your home to a wider pool of buyers and defer some tax obligations. By entering into seller financing, you can create passive income that may exceed the return rates of traditional investments.

A Seller Financing Primer

A simple concept. Seller financing takes place when the seller assumes the responsibility for financing the sale of her home. In essence, the seller assumes the role that a bank or mortgage lending institution would play. By assuming the risks traditionally held by a bank, the seller can make his home available to buyers that might not qualify for a standard loan. The seller-financed promissory note has all of the same features of a normal home loan, including a down payment, interest payments, a monthly payment schedule and protection of the property from default.

Investing in the future. Seller financing can be an attractive option for those who would like to create a passive income stream or who want to avoid the large tax bite of a capital gains sale. Whereas the stock market averages returns of 4% to 6%, a seller-financed loan may yield returns of 8% or more, depending on the agreement between buyer and seller.

Free and clear. In order to pursue a seller financing agreement, your home should be free of liens or mortgage obligations. You’ll need to own the home “free and clear” in order to enter into a seller financing agreement.

Seller Financing Basics

Paperwork. Just like a traditional loan, you’ll want the buyer to be able to provide a credit report, verify employment and provide tax reporting information going back several years. Don’t be afraid to request these documents—your property will be on the line and you’ll want to make sure a potential buyer will be able to keep up his end of the bargain.

A partial deal. You may also consider seller financing to help a buyer acquire a traditional mortgage in cases where the buyer may not be able to raise the capital required for a down payment. You should realize, however, that in this type of situation, the loan between you and the buyer would take second priority to the primary mortgage. Should a default occur, you’d have to wait in line behind the bank to recover your money.

Homework and contingency plans. Before entering into a seller financing agreement, you need to understand the implications of the obligation and what options you have should the deal go south. Consultation with a lawyer familiar with home financing is the best way to understand this complicated arrangement. At the very least, you should have specific language in the agreement that allows you to drop the deal should the buyer fail to provide sufficient documentation. The agreement should also cover your rights to reclaim the property in the event of a default.

The title company. Once you have an agreement in place, you’ll need to engage the services of a title company to handle recording the agreement. The title company can also provide you with information regarding any fees associated with recording the agreement in the state and local public record.

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