SELLERS FINANCING
By Annie Hawkins of Sovereign Associates Inc.
Seller financing of purchases is gaining interest with more buyers and sellers as mortgage interest rates hover around 7.25% and can make sense for buyers who are having trouble qualifying for conventional mortgages.
Seller financing can also be good for sellers who are highly motivated to sell and don’t need to be paid in full right away. In some cases, it may work for an otherwise qualified buyer who has experienced a temporary financial setback, like losing their job.
How Does it work?
When a seller offers financing, they become the bank. As with a regular deal involving mortgage financing, the buyer gives a down payment for a percentage of the purchase price—often 20 to 30%. For the rest of the transaction, instead of receiving a sum of money that immediately buys their property, the seller agrees to an installment plan, usually with an interest rate that is significantly lower than current mortgage rates. A buyer may be able to negotiate a 3% rate, or it could be something like a point or a point and a half below current mortgage rates. With principal and interest payments the seller makes more money than the purchase price over time.
For Whom Does It Work?
—Owners who must sell, no matter what. Offering seller financing can distinguish the owner’s property from others competing in the market. Also, a regular monthly payment over time is reassuring to some sellers.
—Buyers who need seller financing. The buyer may be experiencing a temporary financial setback, and when they try for a conventional mortgage for 70% of the purchase price they will be turned down, even though they know that, say, in 6 months their finances will greatly improve. In this case the buyer may put down 40% and negotiate a rate of 5% with the seller for 1 year. Or the buyer may put down 30% and make an agreement with the seller to make monthly payments to them over the course of several years, sometimes with a balloon payment at the end.
Safeguards for Seller Financing
The seller needs professional guidance to create safeguards for a transaction using seller financing. A lawyer to draw up a contract between buyer and seller outlining the terms is a must. The seller should consult a financial planner as well, to make sure the terms make sense for them. The second safeguard is to make sure the deal is recorded, so that if the buyer stops making payments there is additional documentation to aid in repossessing the property. While there are currently many more buyers seeking seller financing than sellers offering it, there will be certain sellers who will use this option if mortgage rates continue to increase, and buyers search out more strategies for getting that desired property.
