In this current market, with Loft prices trending up, but access to financing is more difficult post housing bubble. So, if you want to sell your Loft, is it a good idea to offer seller financing?
What does seller-financing mean?
Unlike a traditional bank mortgage where a lump sum is given to the buyer to purchase the Loft, seller-financing means that the seller allows the buyer to make payments directly back to the seller. Most often, the Loftbuyer signs a promissory note with the seller that outlines the selling price, the interest rate, repayment schedule and even the consequences if the buyer defaults.
In most cases, a seller-financed note is short-term. Since most sellers don’t want to carry a note for 15 to 30 years, the typical note is for around five years with a balloon payment at the end where the buyer secures a standard loan for the remaining balance.
Is it good for the seller?
Sellers may choose to offer financing for any number of reasons, but some include:
- Being able to sell “as is.” If your Loft requires costly repairs, selling through owner financing may allow you to pass those costs on to the buyer instead.
- Potential investment income. Buyers looking for owner financing may be willing to pay a higher interest rate to you than you would receive through any other type of investment. Typically, you must own the Loft free and clear, and the buyer takes on taxes, insurance and any association dues so all income from the payments goes to the seller.
- Opening up the purchase to additional buyers. Potential Loftowners that were hit with difficulty during the housing bubble may not be able to get traditional financing even though they are now able to make mortgage payments. Self-employed or contractor may not be able to get favorable loans due to tighter underwriting requirements and may desire purchasing through seller financing.
Some possible pitfalls include what happens if the buyer defaults. If the promissory note is executed correctly, the seller gets the Loft back along with all of the monies paid to date. At that time the seller is free to sell the Loft again, but the “buyers” may leave behind damage and the need for costly repairs.
Some things to consider
If you are new to owner financing, make sure to work with a real estate attorney and a professional real estate agent to make sure the sales contract and promissory note fully protect you. There may be tax ramifications to seller financing, so be sure to contact your CPA or tax professional.
Since it is in your interest for your buyer to be able to refinance at the end of the note, offer to report the payments to credit reporting agencies to help build your buyer’s credit score. While individuals typically cannot report directly to these agencies—they have strict lender guidelines—services like Virgin Money can manage and report payments for you to alternative credit reporting companies such as PRBC, that many mainstream lenders now refer to for information on potential mortgagees.
If you’re considering selling your Loft, and wonder about seller financing, talk to us. We can help connect you with professionals to guide you through the process while we market your Loft.