Owner Financing Tips for Sellers
It’s
a tough time for a buyer to get financing. Banks and lenders are making it more difficult for some home buyers to qualify for a loan, which can make it hard for a seller to get the price they want for the property.
The nice thing is you can stand out from the crowd, and use owner
financing. By accepting payments over time from the buyer, the seller provides
an alternative to bank financing.
Seller
financing attracts more buyers and helps the owner get attention in a market
flooded by oversupply from foreclosures. Of course sellers don’t want to jump
from the frying pan into the fire by trading a house that won’t sell for a
buyer that won’t pay.
Here
are 5 safety tips for sellers considering an owner carry contract:
Tip
#1 – Review the Buyer’s Credit
How
buyers have paid bills in the past is a good indicator of how timely they will
make future payments. Always review the buyer’s credit prior to accepting a
promise to pay. Sellers can obtain a signed authorization from the buyer to
pull credit through a reporting agency, or the seller could simply ask the
buyer to obtain a copy of his or her report for the seller’s review.
Tip
#2 – Get a Down Payment
The
more money a buyer puts down, the more “skin” they have in the game. The
greater this equity, the lower the likelihood the buyer will stop paying.
When
people have little to no equity, they are more likely to default or just walk
away from the home. Few sellers want the hassle of taking back a property
through foreclosure, so increase the odds in your favor by requiring a down
payment.
Tip
#3 – Set the Terms
The
terms include interest rate, payment amount, frequency, and the due date for
payment in full. There are also late fees, default clauses, requirements for
insurance, and other standard provisions.
While
the terms can be whatever the buyer and seller agree upon, it makes sense to
set terms that are affordable to the buyer AND favorable to a note investor.
This way a seller is more likely to own a note that is valuable to an investor
in case they ever want to sell future payments for cash.
Tip
#4 – Get Help with the Documents
In
addition to putting the terms in writing, the documents evidence the lien. The
obligation to pay (or IOU) usually takes the form of a promissory note, which
is secured by an owner mortgage or trust deed recorded in the county records. A
land contract or real estate contract are also used in some states. A qualified
attorney or title company familiar with local laws should prepare the closing
documents.
Tip
#5 – Collect Payments Like a Pro
Tracking
the payments, interest, and balance is often referred to as servicing the note.
In addition to collecting payments, a servicer should verify the real estate
taxes and insurance are kept current. The seller can perform servicing but it
is a whole lot easier to hire a third party company to handle this process.