Seller Financing
• A Resource For Sellers •
"Seller Financing" is defined as sellers who help to finance a real estate transaction by financing a portion or the entire purchase. Sellers might consider this when buyers have difficulty in qualifying for conventional home loans. Seller Financing differs from traditional loans in that sellers do not give buyers cash to complete purchases, as lenders do. Instead, sellers extend credit against the sale price of the property while buyers execute promissory notes and trust deeds in the sellers' favor. If the property is not wholly owned by the seller, these "special circumstance loans" must be acceptable to the lenders who hold first mortgages on those properties. Paperwork is prepared by title or escrow companies once the terms of sale are agreed upon by the buyers and sellers.
Sellers considering this arrangement should first evaluate the creditworthiness of buyers thoroughly. The prospect of default is the primary reason why many sellers are reluctant to offer purchase-money mortgages. That said, Seller Financing brings higher prices and the option to close sales sooner (in certain situations).
Benefits
Seller Financing offers some tax advantages for sellers, and it's an alternative financing option for buyers who cannot qualify for conventional loans. Sellers take the same risk as any other lender. Consider these questions as food for thought: Is the borrower a good credit risk? Will the property hold enough value to allow for repayment of all loans made against it? Always run a full credit check on the prospective borrower, require hazard insurance on the property, and include a due-on-sale clause (full loan balance becomes due upon sale). We strongly suggest that sellers who wish to offer "Seller Financing" consult a lawyer before committing to this kind of transaction.
The primary benefits to Seller Financing are higher sale prices and faster closing times. Sellers also expand the pool of prospective buyers, even if some of those may be incapable of obtaining traditional loans. At any point, sellers can sell the promissory note to a lender or investor, to whom buyers will then send their payments, and sellers would cash out immediately.
Downsides
If buyers/borrowers default on these installment contracts, then that income stream is cut-off and will remain so until the seller forecloses or reaches some other agreement with the borrower. Sellers can cancel the contracts, reclaim the land, retain all payments, and benefit from any improvements that have been made on the premises by the buyers. In cases of foreclosure, the legal process to reclaim the property could take up to one year or longer. Sellers are still responsible for the repayment of any loans made against the property in the meantime.
Setting The Rate
Interest rates on owner-carried loans are negotiable. Ask your agent to check with a mortgage broker to determine current rates on traditional first (or second) loans. Seller Financing typically costs less than conventional loans because sellers don't charge as many fees. As for the APR, sellers typically aren't willing to carry loans for a lower return than they would earn if their money was invested elsewhere.
More Information
Our real estate agents are excellent sources of information, but BC Adobe Realty is not a substitute for an attorney on the topic of Seller Financing. We would love to assist you with the sale of your Boulder City / Greater Las Vegas Area property. If you have any questions, please reach out to us by email or call (702) 293-1707.