Seller financing is not one of the most popular concepts in real estate, but considering the tough economic times that are keeping buyers out of the market, it could be a smart strategy for prospective home sellers.
When sellers help a buyer by agreeing to hold a first or second mortgage, the chief drawback is that they do not get all the cash out of the transaction that they might have expected. That can hurt if they had counted on using that money to buy their next house.
But for sellers who can afford it, there can be several positive trade-offs, such as closing a deal and receiving interest over a period of years. And if the mortgage agreement is structured properly, the note becomes an asset with value that can be sold for cash to a mortgage broker or another investor.
It can be a good deal for buyers, too. Borrowing costs tend to be smaller, and past credit problems, which scare away most institutional lenders, may be overlooked if the buyer can demonstrate the ability to repay the seller.
Seller financing is "the glue that can bring a deal together. It makes things happen," said Jim Levie, president of Levie Mortgage Investment Co., an Altamonte Springs, Fla., company that buys and services seller-held mortgages.
"And that's important, especially with couples where one spouse has been transferred out of town and the other spouse is left behind to sell the house. If you can't sell your house here, you've got the expense of maintaining two households," Mr. Levie said.
Seller financing broadens the range of potential buyers, he said. It attracts buyers who can afford a regular-sized first mortgage payment -- plus a smaller second mortgage payment -- but who might not have enough cash for a big down payment.
Sellers who can afford to hold a first mortgage will lure buyers scouring the market for a bargain, Mr. Levie said. The reason: Borrowing costs usually are less because processing fees or prepaid interest charges can be forgotten.
"As a result, sellers usually will find that the closing price on their house will be a lot closer to their asking price," he said. "They won't have to discount the price of their house so much because the buyer will realize he's getting a deal on the financing."
Holding a mortgage also can prove to be lucrative.
Barbara Franks of B&J Quality Properties in Winter Park, Fla., recently sold a condominium involving seller financing. The seller, whose condominium had been on the market for eight months before the sale, used his own money to pay off a $28,000 first mortgage and agreed to hold a $33,000 mortgage for the buyer. The interest payments the seller now will receive will generate about $80,000 over the balance of the term, Ms. Franks said.
The buyer was unable to obtain conventional financing because lenders did not like the high renter-to-owner ratio in the condominium complex, Ms. Franks said.
"Like anyone, the seller in this case would have preferred to come out of the deal with cash, but that didn't appear likely to happen," she said. "In this case, he got a pretty good deal. He's getting $80,000 over the life of the loan, and that's more than twice what he sold it for."
However, not everyone thinks seller financing is a good deal. Jerry Guinn, a broker at The Prudential Florida Realty in Orlando, said that it does not improve the "salability" of a property.
"Mortgage rates right now are the lowest they have been in 14 years and if you have a potential buyer that can't go down to the local bank and obtain a loan, then I'm not sure you as an individual seller would want to participate in such a deal," Mr. Guinn said. "In other words, if their credit is not good at the bank, why should it be any better with you?"
Mr. Guinn said sellers are better off discounting the price of their house to improve their chances of selling. He said getting cash out of the deal -- even less than you had hoped -- is preferable to risking a loan to a borrower who might default.
"When you agree to hold a mortgage to sell your house, it puts you in the lending business," Mr. Guinnsaid. "And there are lots of big lenders out there having problems right now and I think that should be an indication to the 'little guys' that the lending business isn't the greatest one to be in these days."
But Mr. Levie and other mortgage brokers maintain that seller financing is a common and well-accepted tactic in the real estate industry. If such deals are properly structured and if the buyer's financial background is researched, sellers can be confident that the risks are reasonable, the brokers said.
Any seller thinking about offering financing should be prepared to perform the "due diligence" work necessary to determine the buyers' pay-back ability, Mr. Levie said.
That includes obtaining a credit report, credit references and employment history. Sellers who don't want to do that work may find a mortgage broker who will do it for them for a fee. Mr. Levie charges $250, a fee that usually is paid by the buyer.