Creative financing might help sell your home
3. If you've got the equity, offer financing yourself.
There are two ways to go:
1. Full financing: In this case, the seller would act as the lender and take a mortgage for the total amount owed after any down payment. This is typically the arrangement in such agreements as land contracts, trust deeds, contracts for deed, deeds of trust, notes and privately held mortgages.
With full financing, the deed may be passed along to the buyer upfront or once the contract is paid off in full. Two potential buyer types, according to Patton, are people who have relocated but not yet sold their old home (meaning they can't yet qualify for the mortgage) and those going through divorce whose existing home is tied up in the proceedings.
Wylie says, "We're seeing a resurgence (of seller financing)."
For sellers in a position to do this, Christiansen says, "It's potentially a very quick transaction."
Patton adds that full financing is enticing to a buyer who will save in loan origination fees and other closing costs.
2. Partial financing: As the term implies, the seller provides a portion of the financing, typically in the form of seller carry backs, seller holdbacks or second mortgages. A partial financing agreement might mean, for example, the bank lending 80 percent of the purchase price, the buyer contributing a 10 percent down payment and the remaining 10 percent being lent by the seller. "Seller carry backs bridge the gap between conventional financing and more creative seller financing," says Patton. "The seller is essentially acting as a bank offering an additional mortgage."
But would you want to become a lender? Say the buyer
payments stop. Unlike with a landlord relationship, you can't simply
evict, says Patton. "You will either need to follow forfeiture procedures
or foreclosure procedures, both of which cost more in time and money
than a standard eviction."
And partial financing means being second in line, should the buyer default. "Second position always loses out in a foreclosure," says Thomas Donnelly, a senior loan officer for Connecticut-based Cross Country Lenders.
Wiley recommends scrutinizing the buyer's financial condition -- income, assets, credit score, etc. -- and making an evaluation on the person's ability to repay. And get a copy of the person's pre-approval from a lender, Lund adds.
It's not a deal for the "average person off the street," says Donnelly.
"In a down market you may benefit. But you have to be a savvy investor. I would recommend investment classes. And definitely talk to a really good real estate attorney before going that route."
Most experts advise having a professional (but not the buyer's loan officer) handle the paperwork.
Others, such as Steve Hochman, founder and president of Friendly Note Buyers Inc., advocate writing the note yourself. His book, "How to Sell Your Real Estate When Real Estate is Not Selling," offers advice on that front.
Negotiable terms include everything from the interest rate and frequency of payments to whether the payments cover principal and interest or interest only. Balloon payments are another term to consider.
"Typically, these loans are interest-only with a balloon due in five years," Wylie says, adding that the buyer would be hoping to obtain a favorable refinance at the end of the term.
"It has been common for a seller to take a carry back second (mortgage) in down markets," says Jody Davis, past president of the Arizona Association of Mortgage Brokers. "This enables a buyer to qualify for a home in lieu of a large down payment. The seller can sell that note but will need to discount the note to sell it. This is basically like creating an annuity for the length of the note. Generally they are amortized for 30 years, to keep the payment low, with a balloon due in five or 10 years. The balloon can't be less than five years or the buyer's lender likely will not allow the carry back.
According to Christiansen, sellers interested in long-term cash flow "may elect to hold the note for a longer term without a balloon."
But having to wait for the total amount of cash is also a disadvantage, Donnelly notes. There's the risk of future foreclosure if conventional bank financing can't be secured when the time arrives.