INVESTMENT STRATEGY
SELLER FINANCING
Rising Rates? Try Seller Financing! SELLER FINANCING CAN AFFORD THE BUYER AND THE SELLER SEVERAL BENEFITS, ESPECIALLY IN A HIGH-INTEREST-RATE ENVIRONMENT.
DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT This 2010 act applies to any seller-carryback transaction in which the purchaser will occupy one unit as their principal residence. Additionally, sellers can do only three such transactions per year; otherwise, they will be considered a mortgage broker and subject to related requirements. The law specifies certain loan terms that are to be included and excluded. A prudent investor who uses seller financing should become familiar with the law or hire a licensed loan broker to complete the financing aspect of the transaction. (Note: Loan brokers should be paid an hourly consulting fee since they are not providing brokered funds.) COLLECTING PAYMENTS AND PROPERTY TAXES Sometimes with seller financing, the buyer will neglect to pay the property taxes or keep the premises insured. The best way to prevent this is to hire a loan servicing company to handle these items. They will even foreclose if the need arises. The cost is reasonable, and the peace of mind is priceless. IF THE BUYER DEFAULTS There are three alternatives. The obvious one is to hire an attorney or foreclosure company to legally recover the property. Then it will be necessary to make repairs and resell the property or rent it. Consider this option if the buyer’s default appears to be permanent and cannot be remedied. If the buyer’s default appears to be temporary (e.g., the result of a job loss), then it is best to reduce or suspend payments. Once the
by Bruce Kellogg
he Federal Reserve has been raising interest rates to
laws of the state for securing loans on real property. Depending on the state, an attorney, escrow company, or title company will prepare the documents for the parties, making the process straightforward, though not necessarily simple. NEGOTIATING THE TERMS Down payments are usually between 10% and 30%, depending upon the buyer’s financial position, the buyer’s creditworthiness, and the seller’s need for cash. Pulling a credit report on the buyer is essential. It is possible to have a loan where the payments are interest-only, but some amount of amortization is preferable so the buyer is building up equity and can refinance more readily in the future. The interest rate should be a “market rate” or less if the buyer is a friend or family member. Excessive interest rates do nobody any good, just making it harder for the buyer to succeed with the property. The length, or term of the loan is negotiable, based on the needs of the parties. The note may be written with one or more “options to extend,” in case conditions for refinancing are not favorable when the loan matures. The idea is avoid creating a condition in which the buyer cannot pay off the loan.
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combat high inflation. As a result, mortgage rates are about to exceed 7%. This has dampened activity in both residential and commercial real estate. Homebuyers and investors need a way to move forward with their purchases, and “seller financing” is a good choice. To maintain business production, agents and brokers need to consider it also. WHAT IS SELLER FINANCING? In a real estate transaction, seller financing is when the seller and the buyer agree that the seller will lend some of the purchase price to the buyer to facilitate the sale. This is also labeled “owner will carry” (OWC); it is a well-trodden path in residential, commercial, and land transactions. HOW IT WORKS As in any real estate transaction, the buyer and the seller negotiate the terms of the loan, including the principal amount, due date, interest rate, and payments. Other terms could include a late charge, “due on sale” clause, etc. The documents consist of a promissory note and a deed-of-trust or mortgage, depending on the
50 | think realty magazine :: january – february 2023
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