Seller Financing the Safe Way
Before getting too far into some of the ways to protect yourself when pursuing seller financing as a way to get a higher price for your home and a nice return on some investment money, let me make it clear that a real estate lawyer or accountant should be consulted at all times when pursuing something like seller financing. There are intricacies specific to your transaction and your city that can drastically alter the pros and cons of seller financing for your property.
Thinking about seller financing is something that everyone should do when they pursue a home sale, even if that thought is only for a short while. For some real estate transactions, it represents a solid tool that many people do not even think about. As I said, you should consult all of the principal parties involved in your real estate transaction but these are some tips you can use to stay safe if it does turn out to be a good idea for you.
In a best-case scenario, any seller financing deal would involve a large down payment. Getting a large portion of your home buyer’s purchase price up front serves as a great piece of mind mechanism and will also create more favorable terms that your home buyer is more likely to live up to. Obviously, this is not possible in every real estate transaction, so put in your list of things to pursue if the opportunity presents itself.
It is important to be familiar with the credit history of your prospective buyer. Not all credit scores are created equal and obviously, those with bad credit scores should be investigated a little bit more thoroughly than those that have sparkling records. Bad credit alone, however, should not keep you from pursuing seller financing for a particular buyer.
What kind of bad credit does the buyer have? Defaulting on a loan is a much bigger red flag than an outstanding balance at Kohl’s, though both should prompt you to ask questions of your buyer. Getting to the bottom of the story behind the credit score can give you a better idea of who you’re dealing with, the ultimate goal of any credit report or history.
Always trust your first instinct. If you distrust someone right off of the bat, don’t pursue seller financing as a mechanism with that prospective seller. In every real estate transaction, there is a level of personal interaction and if you are not comfortable that a particular person will pay you off, don’t pursue that buyer.
There will be others, especially if you offer solid seller financing terms, so there is no need to pounce on every buyer that comes along. There is some risk in seller financing, so keep that in mind when deciding whether to get involved with loans and mortgage payments with a particular individual. Your gut is usually right.
Finally, there are a number of ways to protect your investment. You can set up a situation where you have a claim on another piece of property your prospective buyer might own that is released once the buyer has paid a certain amount of the mortgage. These types of situations are a bit more complicated and you should consult a real estate lawyer or other counsel before getting involved.
Seller financing is a relatively safe endeavor, but there will always be transactions that go south that could have been avoided by taking a few of the steps above. Most of all, I cannot stress enough that seller financing should not be a solo mission. Involve other real estate experts around you in the transaction and deal from a position of strong information. Build a great foundation around you and seller financing can be a very rewarding, profitable experience.