Winning When Sellers Finance

It’s almost football season! The rankings are out but we’ll see who eventually takes home all the marbles. Do kids even play marbles anymore? Is there an online 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. I’d have a “no other way to finance” marble and one for “I want to earn the interest”. There’d even be an “outside the ring” marble for distressed sellers. But not all marbles are regulation marbles. 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! 

Reasons Someone Might Owner Finance

Here’s the thing. Knowing why a seller is willing to finance is critical. Vacant land loans are scarce especially for out-of-state buyers. At times, sellers also finance so that they can make extra money on their sale. Permit issues are another popular reason sellers finance. These fairly are straight-forward reasons.

But what about when the sellers owe more on the property than it’s worth, when their property is distressed or when the property is overpriced? These are situations when sellers tend to explore a creative 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 are conveyed by way of an “agreement of sale”. This involves “wrapping” the mortgage which basically means that the buyer pays the seller then seller continues to pay their note.

What About Lenders?

Not all lenders embrace this concept because such a sale further encumbers title. While it’s possible to wrap the mortgage without lender permission, title companies will rarely provide title insurance. But the difficulty presented in not gaining lender permission pales in comparison with 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 may be 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. 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 financing and who can advise about the advantages and pitfalls. In this all important transaction, it’s time to put aside kids games and equip yourself to play with the big boys!