Curt
Epperson,
Attorney at Law
P.O.
Box 627 Manson,
WA.
509
687 6236
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Attorney at Law P.O.
Box 627 Manson,
WA.
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Introduction
Information herein is for general purposes only and cannot be used or applied to any specific legal situation or relationship. The information contained in these Web pages is designed to provide information in regard to the subject matter covered. This Web presentation is not a legal, financial or accounting service, nor legal, financial or accounting advice. If legal advice or other expert assistance is required, the services of a specific professional advisor should be obained. |
Seller Financing: Pros and Cons from the Buyer’s Perspective. Finding a property which suits your needs and your budget can be an adventure. Finding a loan to buy the property can be quick and easy or long and difficult, depending upon the circumstances. A loan from a conventional lender means you pay fees and costs for the transaction. The loan fees are about 2% of the total loan amount and the costs are also about 2%. (The costs are things like lender’s title insurance, appraisal, processing fee, underwriting fee, extra recording fees, etc, etc.) If you want a loan of $150,000 expect to pay about $6,000 in fees and costs. Getting a conventional loan requires a hefty amount of your time, especially for the self-employed. (They must usually submit extra documentation such as personal and business tax returns, profit and loss statements, financial statements, and estimated income for the year to date.) Therefore, many buyers seek to avoid conventional loans by looking for properties with seller financing. But there are potential disadvantages. · The property has significant defects. Sometimes sellers offer to carry the loan because the property is defective and won’t qualify for conventional financing. Make sure you carefully inspect before you are committed. · The property is overpriced. The seller may know the price is too high and doesn’t want a bank appraisal to alert the buyer. Just because a property has seller financing doesn’t mean you should pay too much. Do your homework and know what the price should be. · The payments are too high. Most conventional loans are based upon monthly payments over 15 or 30 years and your loan officer will do a careful analysis of how much you can afford. A seller-financed sale may involve high monthly payments over a short time. Make sure the payments are appropriate for your circumstances. If the payments are more than you can afford you are headed for trouble. · The seller wants a balloon payment. A balloon payment means that a lump sum amount comes due at some time during the regular course of payments. It may not seem like much to accept a balloon payment of $10,000 or $20,000 in five years but when the time comes your circumstances may be different. Make sure you will have the money when the balloon payment comes due. · The interest rate and down payment may be high. Often seller financing requires a higher down payment than conventional loans. This means you will have to put in more of your own money up front. Also, seller financing usually has a higher interest rate. Even though you save some money on bank fees and costs the higher interest rate may eat up those savings over time. Be a careful buyer and deal with the disadvantages. Then you will benefit from the positive aspects. Here’s just a few. · Savings of fees and costs. I discussed this in the introduction. The savings can be substantial. · More negotiation and flexibility on the loan terms. Bank loans are based upon market factors that the buyer can’t control. Bank loans are rarely negotiable but you can negotiate seller financing. Strike your best deal on the down payment, interest rate, monthly payments, and length of the loan. · More flexibility on the loan documents. Banks use standard forms for promissory notes and security instruments and if you re-sell the property you usually have to pay off the loan. Seller financing may be more flexible and you might avoid the “due on sale” clause. That gives you more options if you want to re-sell the property. · Discounts for paying early. Sellers will often accept a discount of the balance owing if a buyer offers to pay the loan off early. Many sellers decide they would like to have all their money and you may be able to get as much as 10% taken off the balance by making a full pre-payment. (It never hurts to ask.) · More flexibility if you get in trouble. Conventional lenders hate foreclosures but may have little choice if you fall behind. It’s difficult to change the terms of a bank loan. However, with seller financing if you have problems the seller may be willing to re-negotiate. It may cost you something to get a concession but here again, seller financing is more flexible (especially if the seller really doesn’t want the property back).
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