Offering seller-financing can seem like a tempting proposition for home owners who need a quick sale and like the idea of putting a little extra cash in their pockets. Sellers inexperienced or uneducated about the ins and outs of seller financed deals would be wise to check out all the details on this type of transaction before signing on the dotted line. Carrying the mortgage for a hopeful home buyer has many advantages and disadvantages.
One of the most positive advantages of carrying your own mortgage is the ability to put some extra cash in your pocket. Seller financed deals are amortized much like a traditional mortgage, although the extra interest doesn't go to the bank -- it goes to you, the seller. And home owners can be picky about interest rates because most buyers who select seller financed deals are typically unable to obtain a traditional home loan, and therefore are willing to pay the higher interest rate.
Shorter Listing Term
Properties that languish on the market using conventional selling methods may stand out above the rest when a seller offers financing. This type of financing attracts a whole new set of buyers who are eager to find a home that suits their needs. Although conventional lenders may have turned down these buyers, many often have a sufficient down payment and stable work history. Offering seller financing will often shorten the listing term of your home and turn that "for sale" sign into "sold."
Wait For Payoff
A downside of seller financing is that you'll have to wait several years to receive the total payoff on the property. Although the extra interest is a good incentive, many sellers need the equity from the first home to buy another. Seller financed deals may be amortized over any number of years depending on loan details, but it's not uncommon for terms to be stretched out over 15 to 30 years. Sellers may want to offset the waiting period by requiring a larger down payment such as 20 percent or more.
In the event that the buyer defaults on the loan terms, you may be responsible for initiating any foreclosure proceedings and absorbing the associated legal fees. Additionally, many foreclosures are left damaged and unkempt, with high repair costs and surplus clean up. It's important to conduct a thorough credit and background check before allowing anyone to live on your premises. Once they move in, it may take a lot of time and money to get them out if things don't go as planned.
Meribeth Phipps has been a real estate broker since 2000, specializing in residential new home sales. She holds a bachelor's degree in business and marketing.