For a list of current San Diego properties available with seller financing please email me directly joy@luxurysocalrealty.com your personal situation, home preferences, home location, and any other information necessary for me to access your situation. Inventory and seller financing changes on a daily basis.
Seller financing, owner will carry, or creative financing are an essential component to a tight credit market and a viable option. Sellers can sell faster with a generous return on investment often for full list price or higher. Buyers benefit from flexible qualifying terms. Many potential buyers believe they are unable to purchase a home due to previous foreclosure or short sale. Lenders are not lending to any buyer who has had a short sale or foreclosure in the previous 3 years. Most sellers will not entertain seller financing because of lack of knowledge regarding the benefits. This is because there are legal and financial risks involved. It is always advisable both buyer and seller seek legal representation in owner financing transactions.
The Intricacies of Seller Financing
In owner financing the seller becomes the lender by extending credit to the buyer for purchase of the home minus down payment. A promissory note is executed and signed by both buyer and seller detailing the terms of the loan. A deed of trust or mortgage is recorded. Typically these loans are balloons with final payment due in 3-10 years with the hopes that the buyer will be able to secure traditional financing in the near future. Most sellers want a shorter time period because they want to cut their exposure as a lender as soon as possible.
It is important to recognize owner/seller financing does not mean you can have poor credit, no down payment, or take over the owners existing loan.
Do not entertain seller financing when the seller is facing foreclosure. unless of course you as the buyer are willing to close escrow with enough funds to pay off the full loan balance and any arrears. In any other structure purchasing a home from a seller in imminent danger of foreclosure is not advisable in any way.
Seller Financing Structures
The most common types of seller financing defined
All-inclusive mortgage. Otherwise known as an all inclusive trust deed (AITD), the seller holds the promissory note and mortgage for the entire amount of the home price minus the down payment. The seller receives an override of interest on the underlying loan.
Junior mortgage. A seller second or private junior mortgage is held for the balance of the purchase price, less any down payment. This has larger risk because in the event of a foreclosure a junior lien is in second position to be paid off. If there are not sufficient funds from the sale then the 2nd junior lien receives nothing.
Land contract. Buyers receive “equitable title,” a short term shared ownership, they do not receive legal title. After the buyer makes the final payment or refinances, the deed is received. Also known as a contract for deed or installment sale agreement.
Lease option. The seller rents the property to the buyer for a specific term agreeing to sell the property to the buyer in a specified time frame. Typically the price is agreed upon from the beginning. A portion or all of the rent received can be credited towards the future purchase price as well as an upfront down payment almost always required..
Assumable mortgage. The buyer to swaps with the seller’s on the existing mortgage. With bank approval some FHA and VA loans, and some conventional adjustable mortgage rate are assumable.
Professional Assistance
It is highly advisable that both a real estate attorney and real estate agent assist in writing up the contract for the sale of the property, executing the promissory note, and other pertinent paperwork. A tax preparer or CPA is also crucial for structuring payment and reporting of taxes.
How To Reduce the Seller’s Risk?
Seller’s biggest fears are the buyer defaulting and the seller getting stuck with potentially and unmarketable property. It is possible to alleviate some of this risk with the following:
- Require a detailed application. The buyer should provide a detailed loan application with supporting documentation similar to what they would provide to a traditional lender.
- Allow for the seller to approve the buyer. The written purchase agreement — specifying the terms of the transaction along with the loan amount, interest rate, and term must be made contingent upon approval of the buyer’s financial situation.
- Structure the loan to be secured by the property. The seller can then foreclose if the buyer defaults. It is important to have an appraisal done to confirm current market price.
- Require significant down payment. Recommended is at least 10%-30% of the purchase price. This puts the sellers in a position where if they have to foreclose on the buyer, they get to keep the down payment. In a distressed real estate market this is especially paramount in the event of a possible foreclosure. When a buyer commits with a down payment they are less likely to bail should their financial situation become challenging.
- Due on sale clause. Make sure if you have an existing loan that you do not have an alienation clause allowing the lender to accelerate the loan upon sale.
Negotiation
These transactions are negotiable between buyer and seller subject to usury laws and state specific regulations. Sellers do not charge points, yield spread, premiums, or hard mortgage closing costs. Therefore it is possible to offer a buyer more competitive financing terms than a traditional bank. Sellers also have more flexibility within regards to credit, asset requirements, and other qualifying terms.
Benefits to sellers
- Higher sales price. Because the seller is offering seller financing they should be able to receive at or above full market value.
- Tax breaks. Sellers may be able to pay less taxes in the event of an installment sale only reporting income earned each calendar year.
- Monthly income. From the buyer’s monthly payment the seller will have monthly cash flow.
- Higher interest rate. Owner financing may help a seller obtain a higher rate of return than they would receive investing in other entities.
- Shorter listing term. Make sure if you have an existing loan that you do not have an alienation clause allowing the lender to accelerate the loan upon sale.
Benefits to buyers
- Lenient qualifying terms. Typically the seller will be more lenient with credit standards and more flexible than a traditional lender.
- Flexible repayment options. Buyer and seller could decide on interest only, fixed rate, longer amortization, negative amortization, or a balloon payment with fixed or adjustable interest rates.
- Down payment. Negotiable and determined by each individual situation
- Quick possession. No need to wait for lending processing and underwriting time frames.
- Lower costs. No loan fees, discount or origination points.
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