For Sale by Owner & Seller Financing

As an after effect of the sub prime mortgage crisis, qualifying and receiving a loan has become much more difficult.  Even so, you still have to consider your options and find out what exactly is available to you.  If you find that acquiring your financing through a bank loan is not plausible for you either because of bad credit or other financial discrepancies and insufficiencies, then might just want to consider an alternative method. 

One such method is seller financing, also referred to as owner financing.  This useful tool brings buyers and sellers together for the purpose of closing a deal on their terms and stipulations.  When a home or property is being sold by the owner, traditional loan criteria regarding purchase price, interest rate, and payment methods and schedules can be negotiated to benefit both the buyer and the seller.  Because the deal is usually sans a third party, the seller and the buyer have the final say on the terms and conditions of the sale.  Other special conditions such as the inclusion of furniture and appliances can also be negotiated in the sale.  Closing costs are also less.  Seller financing is the most convenient type of private lending as it offers a "win-win" scenario for both of the parties involved, provided that all necessary precautions have been taken. 

            A typical candidate that engages in offering financing to a buyer is one that is looking to make a quick sale and does not want to waste time waiting on loan approvals.  A seller offers incentive to a potential buyer for either all or a portion of the money need to purchase the home or property.  They have the ability to qualify many more people for loans which results in more buyers for their homes.  Since no loan approval and other red tape is necessary, a deal can be closed between the buyer and the seller in a mere few days.

            Homeowners view seller financing as a smart investment because they have nothing to lose.  If a buyer does not pay the loan, they have the ability to take back the home and keep any money that was paid by the buyer. Because the seller is "helping" the buyer finance the investment, he/she has the home court advantage.  A seller may ask for a higher price for the house or offer a higher interest rate on the loan.  Another possibility is that the seller can sell the house "as is" and they would not have to spend excess money on repairs.  A seller also has the ability to screen the buyers at his/her discretion.  The person selling the house does not want to wait for money, he/she can also do a seller carryback, where he/she carries back the note and deed of trust and then turns around and sells that note and the deed of trust and cashes out.  A seller also has the convenience of being able to create a note and sell it at closing through a process called table funding. 

This type of financing typically comes in the form of a second mortgage that bridges the gap between the money owed on the first mortgage and the money the buyer can offer as a down payment.  There are a couple of different approaches that a seller can take when offering financing to a prospective buyer.  For example, he/she can take back the mortgage on the house and have the buyer sign a promissory note stating that the buyer will repay the loan.  The buyer also signs either a deed of trust or a mortgage.  The seller then transfers the title to the buyer and he/she now owns the house.  As the title holder, the buyer can now either sell the house or refinance the loan for a better interest rate while they continue to faithfully make payments to the seller.  If payments are not made to the seller, the house runs the risk of being subject to foreclosure.

 On the other hand, the seller can opt to keep the title of the property until the loan amount is completely paid off.  A buyer is required to sign either a land sale contract, a contract of deed, a contract of sale, or an installment sales contract.  Although, doing so offers more security to the seller but does not allow the buyer to sell or refinance the house until the entire loan is paid off.  As with any investment, there are risks and disadvantages to both seller and buyer that should be taken into account prior to any commitment.  Both parties involved in the transaction should be well aware of what they are getting themselves into.  If a seller opts to offer financing but decides to keep title of the property, a buyer runs the risk of possibly not receiving that title even if the loan is paid off if the seller is one who is one who takes part in unethical and fraudulent business practices.  In addition, a buyer may not have appraisal protection, mortgage insurance, or proper inspections conducted.  Another thing to consider is that just because a buyer continues to make regular payments to the seller that does not necessarily mean that the seller is continuing to keep up with prior financing that was already in place.  This could result in the home going into foreclosure without the knowledge of the buyer.    

On the flip side, sellers run the risk of having a buyer abruptly abandoning the property without notice, especially if the buyer had very little invested in it.  Discrepancies with credit history and employment status may also come into view after the fact.  Even though it is typically not necessary, sellers should entertain the idea of including PMI insurance which protects the seller from default.  For these reasons among others, when a deal is being made solely between the buyer and the seller, all should be negotiated.   

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