People ask me about Seller Financing all the time, so I thought I’d share why it can make a lot of sense – for everyone.
- Buyer gets a property at today’s low price.
- Seller gets the property sold and a higher return on his proceeds – the interest he will receive on his money usually is higher then he would get by putting it in a bank, CD, etc..
- Escrow has a better chance of closing on time – if everything else is in order. (Note: After 20+ years in real estate, I’ve found that as long as Buyer, Seller, Escrow Officer, Agents and anyone else involved pays attention there isn’t any reason why it escrow shouldn’t close on schedule.)
Well that is the perfect scenario.
Why Seller Financing Now?
For Homes and Land – Financing used to be a granted with Proof of Employment, AAA Credit scores, Bank Statements showing Required Reserve Funds and 20% down could almost guarantee a loan. Not anymore.
In fact, financing a home even with “lender pre-approval” is currently one of the biggest hurdles to overcome. The next are “undisclosed issues” such as dry rot under new paint, plumbing issues etc. . Financing a vacant lot is even more difficult.
Often it isn’t the Buyer who doesn’t qualify for the loan, but rather the property doesn’t qualify. We have seen so many Short Sales, REO’s (Bank Owned Properties), and Foreclosures in the market, many of the comparable sales that the appraisers use today are from these distressed property sales. This practice will tend to reflect “below market value” for homes. So for desirable homes being sold “at market”…cannot get financed “at market”. Bottom-line: Lenders base their loans on the current appraised value.
Buyer Options when a property doesn’t appraise high enough for financing? Buyers have to go to Plan B, C or D .
- Plan B – put more money down
- Plan C – negotiate with the seller to reduce an already very low price – if he won’t, then the Buyer either accepts the price and puts more Cash down
- Plan D – Buyer walks away from the sale.
This is where Seller’s Financing can help a Seller achieve “market value” for their property.
Seller Financing Overview
The Purchase Money Mortgage is nothing new here in Hawaii, or across the country.
There is an Agreement of Sale, where the Buyer assumes financial responsibility for the property but the Seller stays on Title. (Most real estate professionals recommend the Purchase Money Mortgage Agreement.)
The Buyer still has to qualify for the loan, credit history must be acceptable to the Seller, reserves in place, usually a larger than average down payment.
The terms and conditions are pretty much the same as a mortgage from a bank. After terms and conditions are agreed on between the Buyer and Seller, an Attorney draws up the Mortgage. Recording the Mortgage is recommended at the close of escrow.
Also, when buying a home with Seller financing, you have the time (3-5 years & sometimes longer) to shop a new loan and refinance your home.
As for a vacant lot that you are going to build on within the next 3-5 years, Seller financing can prove to be very good for both Buyer and Seller. If the Seller isn’t planning on reinvesting his proceeds from the sale right away, then collecting a higher interest rate on his funds by “carrying” the loan would make sense. This gives the Buyer time to get his plans in order, permits approved and a contractor lined up before getting a construction loan.
What happens if the Buyer defaults on the loan? The property goes back to the Seller – just as it would to a bank if Buyer defaults on a loan to the bank.
Would I ever provide Seller Financing on one of my properties? Yes I would and I am currently holding a Mortgage on a home here in Hawaii. 11/2011
For more information on the Purchase Money Mortgage, visit to uslegal.com
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