Black and Buono Blog

...by Kiley Black

Sellers can finance a real estate transaction by taking back a second note or even financing the entire purchase. Usually sellers do this when a buyer has difficulty qualifying for a conventional loan. In essence, the seller holds the mortgage, and the buyer directly pays the seller the monthly payment.

Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and mortgage.

The necessary paperwork is prepared by an attorney after the terms are worked out between the buyer and seller. If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the creditworthiness of the buyer first. You should consult with your attorney and your accountant regarding the potential consequences of this type of arrangement. Fear of default makes many sellers reluctant to pursue this avenue. But seller financing can complete the sale sooner in some situations.

Seller financing offers tax breaks for sellers and alternative financing for buyers who can't qualify for conventional loans. If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it? You should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that need to be met. Again, it is wise to consult a real estate lawyer when putting together this kind of transaction.

Seller financing typically costs less than conventional financing because sellers don't charge loan fees (points). Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit rates. Sellers usually aren't willing to carry a loan for a lower return than they would earn if their money was invested elsewhere.