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What are the Benefits & Risks of Owner Financing Your Home Sale?

Wednesday, January 23, 2008 posted by Tommi Crow

In a difficult housing market, seller or owner financing can broaden your pool of buyers,  attract top dollar sales prices and eliminate the hassles of dealing with mortgage lenders.   Owner or seller financing can also boost your profits with good investment returns on your money and provide possible tax savings.    But, while the benefits of seller financing can be vast, please consider the risks before you jump into the banking business.  

  • What is Seller Financing?      Seller financing involves extending credit against the purchase price of a home, either by taking a back second note from the buyer or financing the entire purchase, if the seller owns the property free and clear.   In other words, the seller of the property acts as the banker for all or part of the purchase price.
  • What are the Benefits of Owner Financing for Sellers?   People who own their property free and clear can offer attractive financing to qualified buyers to help a home seller faster and provide a better return on their investments.   In addition, owner or seller financed homes sell for a higher price.
  • Who Should Offer to Finance All or Part of the Sales Price of Their Home?    Ideal candidates own their homes free and clear, or they have older VA, FHA or otherwise assumable mortgages.   Other ideal situations include vacant properties owned by retiree’s or wealthy sellers; vacant properties that have languished on the market for several months; estate or court ordered sale situations and individuals who desire income in installments for tax purposes.
  • What are the Biggest Risks Involved in Seller Financing?  The largest risk is Buyer Default.   If the borrower stops making payments, the seller may be forced to initiate the expensive process of foreclosure.  In the event of a buyer default, the seller could lose even more if housing prices have fallen further since the sale. Other risks include property damage or neglect, which can be costly to repair;  repayment deliquency; lack of cash to purchase something else; theft and property destruction.

Later this week we address the topic “How to Offer Seller Financing and What the Terms Should Be”.

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