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Approximately 20 percent of homes sold in the U.S. involve some form of seller financing. That’s a whole lot of homeowners taking on the same responsibility as a bank or mortgage company. But how can a lone individual possibly tap the same resources as a large institution and be assured of payment from a buyer?
“Find out as much as you can about the buyer’s credit worthiness,” advises Dean Coe, a broker in Coldwell Banker’s Winthrop, Washington office. Check the buyer’s credit report, verify employment, and ask for a complete financial history. This includes requesting two or three years of tax returns, if self-employed, bank and investment statements, and any evidence of alternate sources of income. “The examination of these financial records will help familiarize you with the paying habits of the other party,” explains Coe. In particular, find out if the buyer has ever filed for bankruptcy or has a spotty payment record.
The Buy-Sell Transaction
Once you’ve determined that your buyer is financially worthy, ask for a substantial down payment. According to Coe, how much you can ask for depends on the housing market at the time. During a strong market, you can ask for a lot down, since chances are good you have a pool of interested buyers from which to choose. Coe suggests a minimum of 25 percent to 30 percent of the negotiated purchase price.
There are several reasons for such a large downpayment. First, to cover certain closing costs that you, as the seller, will incur. Second, to cover the cost of retaining an attorney should the buyer default on his payments. Another reason is that a large down payment is indicative of a greater commitment toward future payments from the buyer.
Bring in the Professionals
Coe advises that you have the seller-financed agreement drawn up by either a real estate attorney or a title company with escrow services. The contract should clearly stipulate the terms of the agreement, including the negotiated purchase price, term of the contract, rate of payment (monthly, quarterly, or annually), payment amount, interest rate, and late-penalty fee. Once the seller accepts the loan and transfers the house, the seller takes back a promissory note entitling him to receive regular payments from the buyer.
Enforcing a late payment penalty is an excellent way to help ensure timely payments. Coe cites the following two examples: “Five dollars a day for every day payment is not made, or a percentage of the payment outstanding.” Coe also recommends a relatively short term for the contract. “Generally five to ten years,” Coe advises. “You can either amortize for the term so that the buyer owes nothing at the end of the period, or amortize over a 30-year term with a balloon payment in five years or so – once the buyer qualifies for more traditional bank financing.”
It’s Good to Get Paid
“Many sellers don’t like to handle administration and collections, and don’t do a good job at it,” says Coe. These sellers may be better off opening an escrow collection account with a local bank. For a set up fee of about $45 to $60, and $2 to $4 per transaction fee, Coe says the seller can avoid becoming a bookkeeper. Plus, the escrow agency becomes responsible for providing that cumbersome annual report of payments and interest paid for each calendar year, and any default in payment can be traced as a clear breach of contract by the third party monitoring agency.
Another way to help ensure timely payment is to request specific payment terms at the outset. For example, ask the buyer to make several payments in advance at closing, and stay ahead of payments throughout the year. Or, request that the buyer hand over a year’s worth of post-dated checks at the closing, so that all the seller has to do is deposit the appropriate check at the beginning of each month. Naturally, the buyer must ensure funds are in the account to cover each payment, but this will eliminate future claims that “the check is in the mail.”
Coe also suggests that a seller may eventually wish to sell his contract on the secondary market at a discount. This is an excellent way for the seller to receive a lump sum in cash and walk away from the responsibility of carrying the financing.
As a final thought, while foreclosure as a result of defaulted payments is a major headache and time-consuming burden, it does offer the seller the opportunity to regain the property and resell it. It’s important to recognize that because the property itself is collateral on the loan, this worst-case scenario in seller financing also provides the opportunity for a second profit.
Written by Kara Stefan. Article from NoteWorld.com.

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