Seller Financing in a Buyer’s Market

It’s a buyer’s market in real estate, but the poor buyer may find it VERY difficult to get a loan.  Banks are simply not lending the way that they used to.   A savvy seller with financial wherewithal can turn the second fact into an advantage in this market by offering seller financing.  The potential benefits for the seller is that they can often negotiate an interest rate that’s more favorable than it would be from other investments.  They might also command a higher selling price because they are offering the added benefit of financing, since the buyer who chooses seller financing is presumably unable to qualify for a conventional mortgage loan.  Seller financing may be the ONLY way that type of buyer can purchase a home.  There could also be tax benefit if the transaction is structured as an installment sale, which allows the seller to spread out recognition of capital gain.

Of course, the big downside for the seller is the possibility that the buyer will default.  After all, by definition the buyer is somewhat of a risk – for whatever reason, presumably subpar credit, a traditional mortgage lender was unwilling to lend to him or her; that is why the seller is financing the transaction in the first place.

Here are ways to help minimize the risk for the seller: always thoroughly investigate the buyer (this should go without saying).  Get a credit report, but also a criminal background check.  Make sure that the buyer is not presenting you with false identification (identity theft).  Make sure that you get personal, professional, and credit references – and talk personally with them all.

Secure a large nonrefundable down payment, as much as you can negotiate.  The down payment can go towards the buyer’s purchase at payoff, but should remain the property of the seller should the buyer default.  The larger the down payment, the less the risk for the seller.

Structure the transaction carefully, providing creative enforcement remedies.  Often in such transactions, foreclosure is the seller’s only option should the buyer default.  Draft intermediate remedies to the extent possible – remedies for late payments, for instance, might have a strict penalty to discourage tardiness.

Seller financing is not for every seller – but those who can offer this additional benefit may find that the potential benefits outweigh the risks.