With real estate markets on the rise across the country, we are seeing more creative financing tools being used. Seller financed deals have been around since the 1960’s, but are still one of the most misunderstood and misused forms of purchasing a property today. There are many benefits available for all parties if used correctly, but also some serious risks involved as well. How do you correctly use seller financing?
In certain markets, such as San Diego, we are seeing an average of 5-10 offers on listings with a few of them being all cash. Sellers would be very unlikely to accept a carryback here, or a contract-for-deed sale. However, in other less competitive market, this provides a viable solution for both buyer and seller. However, it is absolutely imperative that all parties are knowledgeable on the process.
Seller financing is a form of financing that is typically used by buyers with subprime credit. Conventional loans are not available for them due to credit, loan to value (LTV) or other underwriting criteria. The basic details of seller financing allows the seller to carryback a note on the purchase of the property, and the buyer would pay the seller gradually with interest. Typically, seller financing is used for a portion of the purchase, bridging the gap between what the buyer can qualify for (or pay for in cash) and the total sales price. Sellers typically charge a pretty high interest rates for this type of financing, but often times it makes sense to the buyer, given their financial situation. As you might imagine, having a seller act as a lender with no buyer protection creates many opportunities for conflict.
While it does allow certain buyers to purchase a home when they may not have been able to do so before, it comes with inherent risk. Buyers need to be made aware that in Contract for Deed sales, buyers do not accrue equity or obtain the property deed until they’ve paid off the loan. Worse yet, sellers can evict the buyer if they miss even one payment.
Nonprofit programs have been initiated across the country to help service these types of transactions. Groups such as Bridge to Success offer credit counseling and modified payment plans, in addition to the contract for deed purchase agreements. This helps buyers avoid being evicted and lose money. While technically sellers can charge whatever interest rate they desire, nonprofit agencies will keep it reasonable as they have a reputation to uphold and won’t conduct unethical behavior. So, if your buyer is interested in a contract for deed purchase, be sure to connect with one of these agencies that offer increased buyer protection. (http://realtormag.realtor.org/news-and-commentary/feature/article/2016/07/rise-in-seller-financing-trapping-buyers)
Real estate is filled with different tools and tricks that can be used in a variety of ways to gain competitive advantages. Take time to learn them and make sure your client is well aware of the benefits and risks that accompany all parts of the transaction. It can be complicated at times, but it is nice to know that when using the right Realtor, buying a home is possible for just about anyone.