If you’re flush with cash and other investments, own a home that won’t sell, can easily afford another place to live and have located a financially sound and trustworthy buyer – run, do not walk, to your nearest real estate attorney and draft a home-loan agreement.
For the right parties, seller financing offers a wide range of benefits. A seller who stands to take a tax hit on a home sale reduces his liability over several years while earning a nice investment return on a previously non-performing asset. The buyer, who may not qualify for a traditional loan, reaps the benefits of homeownership.
The ideal buyer brings a large down payment and sterling credit to the deal table. You may be thinking, if they’re so qualified, why not just get a regular loan? The answer is that not all qualified buyers meet lender approval standards. For example, a cash-focused business owner may not have the documentation necessary to satisfy lenders. Alternatively, a professional just embarking upon a high-paying career may not have enough job history or savings. For sellers willing to accept risk, these buyers make good bets.
Deals work just like any other home loan. The buyer typically pays a third-party mortgage servicer who administers deal terms on behalf of the seller, reducing aggravation. The buyer earns mortgage interest and property tax deductions and also enjoys home price appreciation (buyers also assume the risk of falling values). After the financing period ends, the buyer refinances into a “regular” loan, ideally at a lower interest rate and with a nice equity cushion intact.
The seller often earns a return greater than what she would see from a conservative investment elsewhere. In addition, buyers pay for repairs, maintain the property and insurance costs and attend to every task associated with homeownership.
For the greatest chance of success, consult with a tax specialist and an experienced lawyer. Every deal is different and some fail. But, for the right team, seller financing provides tremendous rewards.