By Tracey March
Compared to 2006, homes today are more affordable but qualifying for a mortgage is more difficult. If you want to sell your rental home more quickly and you don’t need the cash immediately, you can increase your pool of potential buyers if you finance the sale yourself. This requires thinking outside the box and a willingness to be flexible, but if you find a buyer you’re comfortable with and get good legal advice, it can be a win-win situation for both parties, with less paperwork and closing expenses to boot.
Seller financing is just that–the seller finances the sale of the real estate. With seller financing you forgo getting all of your cash at closing and instead put the buyer on a payment plan. There is a great deal of flexibility with payment options, depending on your and the buyer’s needs:
- The down payment can be large or small.
- Buyers usually pay on a monthly basis over a specified term, and often with a balloon payment due on or before a certain date.
- Buyers can send payments to you directly, but the preferable option for both parties is usually to have the payments go through a title company, which tracks payments and interest. The title company will also hold title documents for the parties and record them when the payments and interest have been made in full, which assures the buyer that when the loan is paid, the appropriate documents are recorded.
- Interest rates are typically higher than conventional loan rates, but be careful not to violate your state’s usury laws.
There are typically two ways for a seller to finance a real estate deal: the buyer gives a promissory note (detailing the repayment terms) and a Deed of Trust is recorded, or the seller and buyer enter into a Real Estate Contract (or land contract), which is recorded. A key difference between these two options is that with a note and deed of trust, title to the property transfers to the buyer. However, with a real estate contract, the seller retains title until the property is fully paid for. Typically, in the case of a default, a real estate contract is the preferred option for the seller because the process of getting the property back is more efficient.
Because real estate financing options vary by state, make sure you consult with an attorney to find out what options are available to you and their costs and benefits.
As always, the information provided here is just that–it is for informational purposes only and is not legal advice. If you have any particular questions or issues, please consult an attorney.