Seller financing can offer many benefits in today’s market for a seller. It offers a way for an equity seller to stand out from the competition. In a market comprised primarily of Short Sales and REOs, its rare to come across a property with seller financing being offered. In the event one of these properties does present itself in the market, it’s normally gone within just a few days if priced right. In addition, because the majority of buyers who need seller financing can’t qualify for a traditional loan, they are normally willing to accept an interest rate well above conventional rates in order to complete the purchase.
Aside from the obvious investment benefit, a seller can also expect to see tax benefits as well. Because the seller is collecting on the property over time rather than all at once at the time of closing, he/she can typically avoid or minimize the of amount capital gains tax that would otherwise be owed. However, there is always the risk of a buyer default associated with seller financing. Here are some tips to avoid this risk:
Before moving forward with seller financing, I would always recommend doing a credit check of your would be buyer. The fee for this is minimal when compared to the problems associated with a borrower default, and you can typically require the buyer to pay for the fee involved in a credit check. Chances are the buyer is going to have less than perfect credit, otherwise they wouldn’t have needed seller financing in the first place. So rather than just checking their score, you should be more concerned about the full report and the events that have led to their less than perfect credit. Do they have a history of defaulting on their debts, or are there other reasons for their credit problems?
For example: it could be a young or international buyer that doesn’t have credit, or has just begun to establish their credit. If they do have negative reports on their credit report, ask the buyer to explain. If may be that there was a short period of time where they were just unable to make some of their payments, but are now back to good standings with all of their creditors.
Default and Reinstatement options:
Most seller financing terms are simple; pay by X date or be in default and subject to foreclosure, which can be a very lengthy and expensive process. However if the borrower does default, caring out a foreclosure will typically be the last thing you or the borrower will want to do. Before getting to the point of foreclosure, it is likely that another arrangement can be made. For instance: if the default is due to a temporary hardship, then you may benefit from arranging some sort of forbearance period to allow the borrower to catch up on their payments. Although default options can be negotiated after the default happens, it would simplify the process if you included these options as part of the original terms of the loan. You may also want to think about including some sort of initial grace period, followed by a late charge and set timeframe the borrower has before you begin any foreclosure proceedings.
Should you have any questions or need further information,
please don’t hesitate to contact me, (775) 220-1630
Or visit my website: www.SellingHomesinReno.com
NAR designated: Short Sale & Foreclosure Resource
Office: 775 850 5900
Toll Free: 877 922 5900
Cell: 775 220 1630
Fax: 775 850 5901
985 Damonte Ranch Pkwy, Ste. 110
Reno, Nevada (NV) 89521
Legal disclaimer: I am not an attorney, tax professional, modification specialist or credit counselor. The information contained in this article/blog is intended to provide general information on the subject and not to provide any legal, tax, or credit advice. You should not act upon this or any information without first seeking independent tax and/or legal counsel.