Seller Financing - Is it for You?

Seller Financing....Is it For You?


One of our biggest financing issues is finding sources that will take a mortgage on a condo. For years, condos have been the most desired property here to purchase because there is always someone there to maintain it when you are absent.

If we are working with sellers who have seen offers collapse because buyers can’t get a mortgage loan, we suggest they consider offering some variation of seller financing. If structured carefully, seller financing not only makes deals possible but also can typically help transactions close quickly, as less due diligence is required. After all, who knows the property better than the sellers?

There are other perks, too: Sellers can often negotiate an interest rate that’s more favorable than would be available for other sorts of investments. And they might also get a higher selling price as compensation for assisting the buyers. Finally, there can be some tax benefits; if the seller structures the loan as an installment sale, for example, there can be tax advantages based on how recognition of the capital gain is timed.

But against these benefits is the downside of seller financing: the potential for buyer default. This risk is compounded if the deal is structured as a wrap-around deed of trust, as a few are. With a wrap-around deed of trust, the seller issues a promissory note and deed of trust for the dollar gap between the amount of the first mortgage and the buyer’s down payment. When structured this way, the seller’s performance on the underlying first mortgage is occasionally linked to the buyer’s performance. If the buyer defaults, the seller may default, too.

Here are some ways to help sellers minimize such pitfalls, no matter how the transaction is structured.

These are challenging times in credit markets, so there’s a role for seller financing. But be aware of risks so we can help protect your interests.