In recent months I have had a few of my clients, both Buyers and sellers propose the idea of “Seller Financing”. In those discussions it became clear to me that both Buyers and Sellers have not thought this idea through all the way. While it may seem like a win-win scenario, there are risks involved.
If you’ve been considering Seller financing, you may want to keep in mind the following as discussed in a recent article by Tara Nelson, Trulia.com contributor…
- Most sellers who have a mortgage they obtained in the last 10 years or so also have a due on sale clause which requires them to pay it off when they sell the property. Financing the sale themselves, vs. requiring the buyer to obtain mortgage or other financing to pay for the property, prevents them from having the cash to pay their mortgage off, as required. And the vast majority of those who don’t have a mortgage of recent vintage need the proceeds from the sale of their homes to buy their next home or invest in their next property.
- What’s more, even the few sellers who don’t need the cash often don’t want to take on the long-term risk and hassle involved with having to collect payments from a buyer for 10, 15, or 30 years. The sellers who can and will agree to seller financing usually want a premium price and interest rate for it – and the smart ones will require some type of credit check and a deeper down payment than a traditional lender.
- And finally, seller financing, as sweet as it sounds, poses risks for buyers, too. If the seller keeps a bank mortgage on the property and fails to make the payment, the seller-financed buyer could end up losing the home they’ve paid for to foreclosure. Best targets for seller-financing are investor sellers who are looking to avoid capital gains, and best practice is to get a local real estate attorney involved in drafting and recording the transfer and financing documentation.
As always, please feel free to contact Mackenzie with your individual/specific questions regarding your South Lake Tahoe home!