Winning When Sellers Finance?

Pictured home: 13-3420 Nohea St. Pahoa.

It was Super Sunday, and the winner took home all the marbles! Do kids even play marbles anymore? Is there an electronic version? Even though that particular game isn’t as popular as it once was, like football, seller financing is always in vogue. In fact, if I had a marble for every reason a seller might offer to finance, I’d have a sock full.

Finance Gamification

I’d have a marble for “no other way to finance” and one for “I want to earn the interest.” There’d even be a marble for “outside the ring” for distressed sellers. But not all marbles are regulation. In fact, players sometimes “fudge” by playing a “non-regulation” marble. When this happens, the “pros “generally feel it’s time to take their marbles and go home!

Here’s the thing. Even in times when seller financing is less risky for buyers, knowing why a seller is offering financing is critical. For example:

• The mortgage meltdown left us with few options for vacant land loans, especially for an out-of-state buyer.
• At times, sellers also opt to offer financing so they can make extra money on their sale.
• Permit issues are a popular reason for offering financing as well.

These are all fairly common and straight-forward reasons for seller financing. But what happens when the sellers owe more on the property than it’s worth, or when their property is otherwise distressed, or when the property simply will not appraise for the purchase price?

Buyer Beware

These are situations when sellers tend to explore every sales approach. For a buyer, these offers should be considered with caution because there could be a “fudging” seller involved. Sales with an existing mortgage on the property are conveyed by way of an “agreement of sale.” This involves “wrapping” the mortgage, which basically means that the buyer pays the seller and the seller continues to pay their note.

Not all lenders embrace this concept because such a sale further encumbers the title. While it’s possible to wrap the mortgage without lender permission, most title companies will not provide title insurance without it. But the difficulty presented in gaining lender permission pales in comparison with the problems created when a seller stops making payments on the underlying mortgage.

This begins a chain of events that leaves everyone distressed. Of course, there are ways to address risks, but it’s never foolproof. Seller financed properties generally do not (but can) include a formal appraisal, so carefully consider information about comparable sales.

Play Smart, Not Hard

There may be times when seller financing works best but be sure to consider the players and understand why they are playing. And by all means, hire a REALTOR® who understands this type of financing and who can advise you about the advantages and pitfalls.

In this Superbowl of transactions, it’s time to put aside kids’ games and equip yourself to play with the big boy. Hope you enjoyed the game!