Seller financing can score you an East Tennessee lake home sale faster, especially in a slower market with higher interest rates, but you have to duck and dodge the obstacles that come with it.
If you’ve never heard of seller financing, you’re not alone. Seller financing — also known as owner financing — is much more common when selling a business than when selling a home. Seller-financed mortgages accounted for just 6% of mortgages from 2009 to 2019.
But with the tightening credit market and less liquidity all around, seller financing might be the way you get a good price and a quick sale on your lake home. So what is seller financing, how does it work, and when does it make sense? Let’s dig in.
What is seller financing?
People usually finance buying a house through a bank or other traditional lending institution. That’s where most homeowners send their mortgage payments every month.
With seller financing the seller lends the buyer credit for part or all of the purchase price, minus a down payment, and the buyer makes monthly payments to you. The lake home seller is the lender.
With seller financing, the seller extends credit in a short-term loan, minus down payment, for some or all of the remaining price of the lake house. The seller and the buyer sign a promissory note, and the buyer pays month to month, with interest.
When and for whom seller financing makes sense
Seller financing can make sense in certain markets or situations. In HomeLight’s New Year 2023 Top Agent Insights report, agents surveyed by and large agreed that in most markets the hot seller’s market of 2020-2022 has ended. In a cooling market, seller financing could be worth considering, in certain situations.
One such situation is when you would rather have a staggered income over a few years vs a lump sum payment or when an otherwise perfect buyer won’t qualify for a traditional mortgage. This may be because they just moved to the area, are going through a divorce, or the property type is difficult to get a mortgage for. This situation can also include when you’re selling an older house that needs a whole lot of renovation, and the buyers are planning on renovating it and flipping it.
The high-interest rates being offered by lending institutions in 2023 are deterring some lake home buyers. Seller financing enables you to offer a better rate than the banks, while still making a profit for yourself. For lake buyers on a budget, lower interest rates could be the reason they bid for your home vs another comparable one.
Options for seller financing
There are a few different ways you can set up seller financing:
- All-inclusive seller financing loan: you finance the entire cost of the house minus the down payment.
- Junior seller financing loan: you finance only part of the cost of your house, minus the down payment. It’s often the difference between the house price and what a traditional lender is willing to cover.
- Land contract: both you and the buyer share ownership — called “equitable title” — until the final payment is made to you. The buyer lives in the house and covers maintenance, taxes, and insurance, but the deed is not fully transferred until the house is fully paid for.
- Lease option: you lease the home for a fee and promise to sell it to the lessee within a specified time. Some or all of the rental payments can go toward the purchase price.
- Assumable mortgage: the buyer takes your place on the existing mortgage you have with your own lender. Your lender has to approve, of course!
Risks and challenges for seller financing
The main obstacle for many sellers is that you have to own your home free and clear to offer this option. If you still have a mortgage, your lender has to approve seller financing, which is rare.
Say you do own your home. You do offer seller financing, and that home gets sold. Remember that you might now be the sole lender.
That’s fine, as long as the payments keep coming every month. But what if they stop? Where do you turn then? Nowhere. This job is yours, and yours alone, to handle.
Imagine that. Foreclosing is your problem, and you may spend in the tens of thousands of dollars on legal and other fees, plus spend the time it takes to supervise the foreclosure process.
In the meantime, you are no longer getting that payment every month you were counting on.
The maintenance, property taxes, and insurance? It’s still your house. Yup, they’re all suddenly your problem again.
The other downsides of seller financing
Even if everything goes well, the taxes in a seller-financed purchase are extremely complicated, and you will need to be organized with your documentation and should consider hiring a professional. Home sale tax implications are complicated and your eligibility to have part of the profit from a primary residence sale be tax-free may have changed.
For your own protection, you will need a loan application and all relevant documents from the buyer, and it’s on you to get everything checked and vetted. Remember, you’re doing all the lender work here.
Minimizing the risk of seller financing
Seller financing has risks, but they can be managed if you approach it professionally and as thoroughly as a financial institution would. This means, getting your documents in order.
Get a complete loan application as thorough as a bank would use, and take the time to confirm every detail of the buyer’s financial situation. You can find basic applications online.
The contract needs to state that the sale is subject to your approval of the application. You may need legal assistance to get these steps right.
Make sure the loan is secured by the property: ensure the right to foreclose if necessary. You do not really want that house back, but at least you will get it. If you need to, you’ll be able to sell it again.
Do not accept less than a 10% down payment so your lakefront specialist agent and escrow fees are covered. You are more secure with a buyer who has a serious financial investment in the house.
Don’t let impatience tempt you to accept a buyer your instincts tell you are not a safe bet. Make sure you’re selling to the right buyer, one who is likely to repay the loan you’re extending.
If you’re thinking about seller financing, work with a top agent
We have a fantastic Lake Team who could help you understand if seller financing is something to consider for your dream lake home or sale of your unique lake sale.
Give us your terms for seller financing, and the details of what you are willing and able to do to work with a buyer.
If you see these terms in other listings in your area, you will have a much clearer sense of what the “competition” is up to, which may help you decide if the risks are worth choosing seller financing for yourself!
Original Article by Residential Realty Today.
Reposted by Lakefront Living Realty, TN.