Tips for Seller Financed Sales

As banks continue to hold tight to mortgage financing reins and home sales continue to run stagnant in many markets, many individuals are considering seller-financing to facilitate real estate transactions.

I have been on both sides of the seller-financed mortgage equation at different times, and I know, as with most financial transactions, there are risks and benefits. Thorough planning and consideration, however, can most definitely lower the risk as well as increase the likelihood for a successful transaction for both parties.

Deal With a Stranger

While it may seem safer to deal with friends and relatives, when it comes to financing a home, it is probably better to deal with a perfect stranger. If the mortgage goes bad, the reality is that the only way the seller can retrieve his investment is to foreclose on the home. That can become difficult if the home buyer is a close friend or relative.

If a seller chooses to finance a home to a related buyer, the transaction should hold all the same tenets as if an unrelated third party was involved. If it is not handled as an arm's length transaction and special accommodations are provided to the related buyer, a court could later deem the transaction as a gift, rather than a sale, and the seller could lose their financial footing in the agreement.

Know the Facts

The buyer should ensure the seller has complete authority to enter into a seller-financing agreement. If the property is not owned outright, the terms of the existing mortgage may not allow for the transfer of the property to a new owner while the first mortgage still exists to the original owner. In addition, if the seller does not continue to pay that first mortgage, the original mortgagor can foreclose even if the new owner has never missed a payment.

For the seller, it is important to consider the overall financial situation of the buyer. A credit check from a major credit bureau can provide a large amount of information in addition to whether or not the buyers are current on their existing debts, including past bankruptcy filings, previous residences, and previous and current employers. A poor credit history is most likely the reason a buyer is seeking a seller-financed property, but there may be extenuating circumstances that the seller should consider. When I sought a seller-financed home, I had just exited a financially devastating divorce. I was upfront and honest with the seller, providing proof of my own sound repayment practices despite the anomaly on my credit bureau created by recent events.

Advantages

For the seller, one main advantage is that seller-financing opens up the pool of potential buyers to those who cannot obtain traditional financing, increasing the likelihood of a sale. If the seller is not in need of the entire sales price upfront, a seller-financed mortgage may result in a higher return than other investments.

For the buyer, seller-financing can provide the benefits of home ownership that may not otherwise be available due to poor past financial decisions or circumstances. In my case, a seller-financed mortgage allowed me time to rebuild my credit. Two years later I was able to obtain a conventional loan and pay off my seller-financed mortgage.

Disadvantages

A poor financial history often predicts future financial irresponsibility. The seller should be fully aware of how to secure a proper, enforceable mortgage and be prepared to take the steps necessary to quickly foreclose if needed.

Seller financed sales still convey the title to the property, as well as all rights, to the buyer. In a case in Tampa, Florida, during the foreclosure process of a seller-financed property, the county purchased a substantial portion of the property from the owners (the buyers in default) under eminent domain for the widening of a road. Despite the fact that the home was in foreclosure, legally the buyers were still the rightful owners and were able to collect tens of thousands of dollars from the sale. The seller eventually was able to foreclose on the now much smaller, less valuable tract but was not entitled to any of the proceeds from the county purchase.

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