I’ve been getting emails from sellers anxious to sell their properties.  It usually comes down to price in situations like this, but what about the people who don’t want to lower their price any further, and in some cases have already made lots of improvements to their property. What’s left? You can give a cash bonus to the buyer or the buyer’s agent, but if you really want to stand out, offer seller financing.

Buyers can save several thousand dollars in lender fees with seller financing, and on the seller’s side, seller financing has always been a way to get a higher rate of return for your investment. If you put $100,000 in a savings account, you’d earn about 5 percent. But if a buyer sets up a 15-year mortgage at 6.5 percent, you’ll earn a higher rate of return on your money. And, since the buyer will be paying you principal and interest, you’ll have a very healthy cash flow.

If you’re going to consider seller financing, there are several different types from which to choose:

Purchase money mortgage (PMM):
A PMM is a standard mortgage in which the buyer makes monthly principal and interest payments according to an amortization schedule. If you’re financing the entire amount of the purchase, you are the primary lender. Only a federal income tax lien or a real estate lien (for unpaid real estate taxes) would take a higher priority over the primary lender.
 
Articles of Agreement:
Also known as an “installment sale” or “installment purchase,” the net effect is that you’re allowing the buyer to purchase the property a little bit at a time. The buyer receives an interest in the house, but you hold title until the buyer has paid off the loan in full.

Second mortgage or home equity loan:
Often, a first-time buyer can qualify for a loan but doesn’t have enough cash for the down payment required. So you make up the difference between the first loan and the sales price of the home.
 
Buying down the rate on the buyer’s mortgage:
While this isn’t seller financing, it is something you might decide to offer in order to increase the odds that you’ll sell your home quickly. If the interest rate on the buyer’s loan is 7 percent, and you want to buy down the interest rate for three years, you would pay the difference in interest between what the buyer would owe at 7 percent and whatever interest rate you think would be meaningful. Often, the interest rate in a buy-down situation would be several percentage points less than the going rate. So, you might buy down what would normally be a 7 percent interest rate to 4 percent for three years, or you might step it up and buy down the rate to 4 percent for year 1, 5 percent for year 2, and 6 percent for year 3. In the fourth year of the loan, the rate would go back to 7 percent.

This week’s Real Estate Insight:

If you decide to offer a purchase money mortgage or sell your home through an Articles of Agreement, or installment sale, you must have paid off all or most of your mortgage If you haven’t, your lender could find out and call your mortgage, which means you’ll have to pay off your loan in full immediately or risk having your home go into foreclosure. In your mortgage is a “due on sale” clause, which means that the entire mortgage must be repaid if the property changes hands. And most importantly, if you’re going to offer any form of seller financing, be sure to work with a competent real estate attorney who can draft financing documents that will protect you.

This entry was posted on Friday, December 29th, 2006 at 2:15 pm and is filed under Real Estate Insight. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.