Seller financing may be making a comeback. In th1960’s’ and 1970’s it was not uncommon for sellers to finance the sale of their home to qualified buyers, but all that went away when interest rates skyrocketed and when anyone could get a loan. Since the mortgage collapse and the real estate recession, it has become much harder for buyers to get loans, and without a job or some other disqualifying data, buyers cannot buy homes and sellers cannot sell homes to those buyers.
Seller Financing Making a Comeback?
We may be coming full circle back to seller financing as an option. The circumstances have to all fall uniquely in line, but if they do, seller financing could be the key to selling and buying. What are all the circumstances that must fall in line, and how does seller financing work?
Seller Financing – How it Works
Here’s what needs to fall in line for seller financing to persuade a seller to carry the contract and for a buyer to be able to close on the deal. All of these need to happen:
- The seller’s home must be free and clear, unless the existing balance is small enough to be paid off by the buyer’s down payment. You cannot get away with seller financing that wraps an underlying loan like you could in the ’70’s and ’80’s. All loans have “due on sale” clauses now, so any sale will trigger that and the entire balance will be due and payable immediately. This is a big hurdle that filters out a lot of homes for sale, but if you can find the right home in the right area at the right price, and if it is free and clear, you might be able to put a sale together, subject to these following conditions.
- The seller must not NEED the cash at closing from the sale. In order for seller financing to work, the seller must be financially capable of taking the payments over a long period of time.
- The seller must not have any liens, judgments, or tax liens on the property, which must be paid off in full if the property sellers.
- The buyer must have a sufficient down payment to take care of the seller’s closing costs, including the excise tax, the title insurance costs, and the real estate commission.
- The buyer must be able to demonstrate to the seller that the buyer is a reasonably safe financial risk, which means the buyer’s credit report should not be horrendous, and if the buyer doesn’t have an existing job, he should have a source of income that will make the payments and property taxes and insurance.
- The buyer must be able to persuade the seller, preferably in person, that the buyer is likable, a good person of good character who is honest and diligent.
Seller Financing with a Deed of Trust
In Washington state seller financing can be handled in one of two ways:
The first seller financing option is a real estate contract, which is a single contract that includes the buyer’s commitment to make the payments and the security for the seller. Real estate contracts, or contracts for deeds, or land sales contracts are not used so much anymore. A real estate contract is forfeited, not foreclosed, and it only takes 90 days to forfeit a real estate contract.
The second seller financing option is the one that is much more popular. This is a promissory note and a deed of trust. The note is the evidence of the obligation to make monthly payments and the terms, and the deed of trust is the security instrument which secures the seller’s interest. A non-judicial foreclosure with a deed of trust in Washington takes a minimum of 190 days from the date of default, but typically a foreclosure takes 7 to 10 months from the date of the missed payment.
Seller Financing is Back
Having been a real estate attorney I understand the details necessary to make seller financing possible. Contact me by email or telephone, and I’d be delighted to help. While seller financing requires a number of unique circumstances or conditions, seller financing seems to be making a small comeback in this current real estate market.
Last Updated on August 20, 2011 by Chuck Marunde
Hello I’m interested in your article on seller financing. I had a few questions. Are you available to elaborate more on that strategy. I am a active duty officer in the jblm area in Tacoma Washington. Hope to hear from you soon. Thanks
A potential buyer of a small piece of property wants my 94 year old mother to use the promissory note and deed of trust method so he can obtain a loan to build a house on the property. He claims that he will be able to pay the total amount for the property after he obtains the loan. Question 1: Is this possible and do you know of any examples of this being possible? Question 2: Have you ever seen or drawn up a promissory note that let the buyer pay payments for 2 to 3 months and then have the balloon payment take effect? Question 3: Does the deed of trust give the buyer ownership right away but still give the seller the right to take it back if the buyer defaults without a fight in the courts? Bottom line is at 94 my mom is not interested in a long term contract so I’m trying to give her good advice because I’d be handling any hassles that would occur. Thanks in advance for you advice. My mom is in Port Angeles. The property is in Silverdale.
James, the buyer’s proposition is far too risky for a seller who is in her 90s. It’s really quite a long explanation, an hour if we were sitting in my old law office, but suffice it to say that in order for the buyer to get a loan to build a home, your mother would have to subordinate her note and deed of trust to the bank who would demand to be in first position. The buyer could take all the loan money and walk, leaving your mother with a bank loan to pay off before she could get her property back. It’s complicated.
Hi there,
I am in the market to purchase raw land as an investment. And then to late build my dream home on. I already own a home and have a mortgage. That I one day will sell to make the investment property my primary home. I’m in contact with the seller and want to propose to him the seller financing option. So it’s a less head ache for everyone. What I’m wondering is.. what steps do I have to take to get the sellers financing paperwork started? Basically stating I will be purchasing this land for a certain price, I will be masking these certain payments every month on the same day for so many years at this certain interests. The land is basically mine and the seller cannot sell it. Thank you look forward to hearing back from you.
Brittany, it’s just a matter of putting your agreement with the seller in writing and having the right addendums attached with the right language. Then if there’s no Realtor involved, you take your agreements to the escrow company so they can close your transaction.
We can’t sell my mothers house. She passed away and we have no mortgage. As an executor to the estate do I have a right to use seller financing to sell the house? I own 1/3 of the house and my other 2 sisters the other 2/3( And they are afraid of seller financing).
Bill, the rules of probate are strict, and while a judge has some discretion, he’s not likely to make a decision that one of the heirs disagrees with, especially if there is any level of risk with the strategy. Best if all of you agree before proceeding.