If a seller helps to finance a real estate transaction, it is called seller financing. Usually, sellers do this when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home.
The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and seller. If you are a seller considering such an arrangement, it is critical to thoroughly evaluate the credit-worthiness of the buyer.
It is important to consult with legal counsel and your accountant regarding the potential consequences of this type of arrangement. You can also contact the Internal Revenue Service for a copy of its Publication 537, “Installment Sales.” Order by calling (800) TAX-FORM or visit www.irs.gov/formspubs.
Seller financing offers tax breaks for sellers and alternative financing for buyers who can’t qualify for conventional loans. If you are a seller, the risks you face are the same as those facing any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all loans made against it?
You should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. There also are financing, disclosure and repayment-term requirements that need to be met. Again, it is wise to consult an attorney when considering this type of transaction.
TIP: The interest rate on an owner-carried loan is negotiable, but is influenced by current Treasury Bill and Certificate of Deposit Rates.