Time for Seller Financing?

You don’t need to be a mortgage note seller to know that the US real estate market is pretty volatile right now, but don’t panic? “Volatility” does not equate to a bad situation for everyone. Subprime woes ultimately came from a chain of actors that ran from borrowers with credit problems up to large institutions who bought into the hype of middlemen pushing poor lending practices. If you stay away from that chain your prospects could be very different, even when you work with borrowers who can’t get the mortgage they want in the current climate.

If you want to sell your home, seller financing might be the way to go. In a seller-financed loan, you provide some or all of the credit, effectively taking the bank’s role in lending to the buyer. You might provide some financing to make up the difference if the buyer can’t quite make the down payment, or you can take over the entire mortgage note. In either case, the process has benefits and drawbacks. The chief benefit is that you can entertain offers from a wider range of potential buyers. If you’re having trouble selling your property, it could be the way to go.

The main hurdle in financing the sale is verifying that you can trust the borrower. You need to apply a sensible set of standards to ensure that the buyer’s going to make those payments regularly. At this point, you’re probably asking, “If those subprime lenders couldn’t tell who was going to pay, how could I do any better?” There are three answers to this:

1. In many cases, front line officers for subprime lenders knew perfectly well that borrowers couldn’t pay. They just didn’t care because they didn’t personally shoulder any risk. In your case, this is your money, so you will care.
2. The housing market’s not the same. Lenders are more cautious – often too cautious – which means that there are excellent prospects who are being left in the cold by institutional lenders. These people include successful businesspeople (they’ve got the money. But as self-employed persons institutions don’t like them) and prospects with very secure incomes, but a limited credit history, such as unionized workers.
3. Seller financing is better supported than it used to be because you have more options to sell your mortgage note when the process becomes a hassle or you’ve decided you need a lump payment after all.

If you decide on seller financing, be prudent; you’re in the driver’s seat now. Retain a good lawyer before you even get started and discuss the borrower profiles you’re willing to accept. Get agreements drawn up before you talk to any prospect! Once you set these requirements down, don’t waver, no matter how friendly and trustworthy a prospective buyer looks. If you’re going to entertain non-traditional mortgagors you should list your limits before you meet any of them. This is not a matter of being positive or negative about the person, but about their ability to provide a reliable, long term investment. Or think of it this way: They probably aren’t going to pay more because they like you, so why should you accept less because you like them? If you have a good lawyer, well-defined standards and common sense, seller financing can work very well.