Selling in a buyers market can be tough, especially if your house is the outlier in your community. If your house won't sell or you want to launch into the investing game without needing to manage renters, you may want to consider seller financing.
Although you may think you'll get laughed out of town for asking the seller to lend you the money to buy their house, it's more common than you think. Here are the basics that you need to know.
What is seller financing?
Seller financing opens the door for someone to buy a home who can't get approved for a loan, such as an investor whose credit is tied up or an individual who is rebuilding their credit. Instead of going through a bank or mortgage broker, the seller would become the lender and the buyer would make payments to the seller. The buyer can use seller financing to finance the whole property or get another loan and use it alongside seller financing.
The financing portion looks like this:
The seller agrees to become the lender in the transaction. The buyer and seller agree to the terms of the financing, including interest rate, monthly payments, payment schedule, and other aspects of the loan. The buyer also puts a percentage down upfront as a sign of good faith.
Although the seller doesn't have to hold the deed to the house, if they still owe money on the house, they will need to make sure the terms of the seller financing are acceptable with their lender. If the seller owns the deed to the house outright, they typically hold onto it until the buyer has bought the property free and clear.
Seller Financing Requirements
Negotiating the terms of your agreement is one of the perks of doing a deal with seller financing. While you are negotiating, however, you'll want to take a look at laws and regulations specific to your state. Some states might prohibit balloon payments, for example.
As with most investment properties and house sales, you can expect to pay taxes on it. When you sell a home traditionally, you receive a lump sum that you will then be taxed on as a capital gain. When you use seller financing, however, you are claiming the gain as an installment sale.
In installment sales, you typically pay taxes on the gain as you go. This may be better or worse for you financially, depending on your situation. Make sure you talk to your CPA about the tax implications before diving into seller financing.
Benefits of Seller Financing
There are quite a few benefits of seller financing for both the buyer and seller.
Benefits for Sellers
- Attractive sale. Seller financing can make your home more attractive in a buyer's market.
- Solid investment. The interest the property accumulates could be more than any rental property—and without the property management fees.
- Low risk. If the buyer stops making payments, you'll still have the property that you can turn around and sell later, plus you get to keep the payments up to that point.
Benefits for Buyers
- Lower bar. You'll probably have an easier time qualifying for the property.
- Minimal work. The property is usually move-in ready, which means that although you can make changes to it as the owner, chances are you won't have to right off the bat.
- Flexible terms. Since you are the one negotiating the financing terms with the seller, you have the unique opportunity of structuring the loan, down payment, and closing cost terms in a way that will benefit you.
Drawbacks of Seller Financing
Benefits typically come with some sort of drawbacks, and seller financing is no exception. Here is what you need to be on the lookout for if you are considering seller financing.
Drawbacks for the Seller
- Repair risk. The house may end up needing some repairs if the buyer defaults.
- Possibility of foreclosure. If the buyer stops paying their monthly payments, it will land on you to foreclose on them. While many buyers just move out, you may be stuck with one that refuses to leave. the foreclosure process comes with fees along with a process.
- Seller financing isn't like bartering over the price of a car. You'll need a real estate professional to draw up the contracts and help negotiate the sale. You'll also be responsible for paying taxes on the property and collecting payments.
Drawbacks for the Buyer
- May not get approved. Just because you aren't going with mortgage broker doesn't mean the seller won't run a credit check. If your credit score isn't up to par, you could be denied the house.
- Title issues. When you borrow money through a bank, they'll hire someone to run a check on the title to make sure there are no liens associated with it. While you can hire your own lawyer to check on the title and get title insurance, you are responsible for it, which means if you forget, it could mean quite a headache later.
- Balloon payments. Some states don't allow them, but in the states that do, you might owe a lump sum in the form of a balloon payment at the end of the term. Make sure you are building your credit before then to refinance and pay off the loan, or that you have enough money saved once that balloon payment arrives. If not, you'll be in for a rude awakening.
Making Seller Financing Happen
If seller financing is something you want to start doing, talk to your real estate agent. They'll help you find a house or a buyer, and negotiate the terms on your behalf. Your agent will also be able to help you write the contract so it is legally binding and according to the terms set.
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If you need a top real estate agent to help you out with a seller financing deal, you need Clever. Our experienced agents have seen just about everything, come highly recommended by homeowners in your area. Call us today at 1-833-2-CLEVER or fill out our online form to start.