Curt Epperson, 

Attorney at Law

P.O. Box 627   Manson, WA.  
509 687 6236

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Information herein is  for general purposes only and cannot be used or applied to any specific legal situation or relationship.

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Seller Financing:  Pros and Cons from the Seller’s Perspective.

There’s more than one way to sell real estate.  Most transactions involve financing provided by a bank or other lender.  But some transactions are excellent opportunities to provide seller financing.

Seller financing creates a continuing relationship between the seller and the buyer.  Instead of receiving the full price in cash at closing the seller receives a down payment (usually 10% to 30% of the price).  The rest of the price is paid over time with interest.  In other words, the seller is the lender. 

There are two primary situations where seller financing isn’t viable.  First, when the seller owes substantial money on a loan that must be paid off when the property changes owners.  Second, when the seller needs cash for some important reason.  (For example, the seller needs cash from the sale of a home to buy another home.)

Before deciding on seller financing, consider some of the negative aspects.

·                  The buyer stops paying.  This is the big bad wolf.  But a default isn’t the end of the world.  In most states properly drafted legal documents can provide quick and easy foreclosure, in as little as 3 – 4 months.  But first, minimize the risk of default.  Require a substantial down payment (25% is nice), do a credit check on the buyer, and check the buyer’s business and personal references.

·                  The buyer goes bankrupt.  This is the big bad grizzly bear.  It will cost you time and money.  But bankruptcy doesn’t happen often and when it does the rules allow a secured lender (that’s you) to ask the court for an order (usually granted) to start foreclosure.

·                  The buyer is chronically late.  Here’s the “your check is in the mail syndrome”.  The best remedy is to show the buyer you mean business.  A letter from your attorney will usually work wonders.  Make sure your documents require the buyer to pay attorney’s fees.  Also, make sure your documents have a late payment penalty so when you hear, “I know I’m late, but your check is in the mail”, you get an extra 5%.

·                  You get used to a nice 9% return and then the buyer pays off early.  This can be a nuisance but most people don’t consider it bad to get their money early. You can reduce your loss of interest income, or excess tax payments, by including a “pre-payment penalty” in your documents.  

If seller financing is a viable option there are many positive considerations. 

·                  A larger pool of potential buyers.  Some buyers only look for properties that offer seller financing.  (They know that bank loans cost about 4% of the loan amount.)  Other buyers may have difficulty getting a conventional loan.  (For example, sometimes it’s difficult for a self-employed buyer to get a conventional loan even is she has perfect credit.) 

·                  A shorter time to close the sale.  Transactions with lenders take longer to close.  Most loans require an appraisal and some require an inspection. The appraisal can take weeks to complete.  If the inspection reveals defects in the property the lender might require time consuming repairs even though the buyer isn’t concerned.

·                  Tax benefits to the seller.  Tax consequences depend on individual circumstances but big taxes often follow a large capital gain.  (Capital gain means the property has appreciated in value and the seller is making a profit.)  The government may take as much as 20% of the profit.  Seller financing can help reduce the tax.  It spreads the gain over time because taxes are paid as payments are received.  Spreading a large gain over time may prevent being bumped into a higher tax bracket or create time to take some capital losses to offset the capital gain.  Also, some extra time might give you a chance to reinvest in something that provides tax shelter.

·                  Good interest earnings. Over time, the buyer makes payments of principle and interest.  Seller financing interest rates are usually 1.5% – 2.5% over conventional home loans and 4% to 5% over money market saving accounts.  Instead of putting cash in a CD or money market fund at 5%, the seller could earn a 9% rate on the loan. 

·                  A relatively safe investment.  Seller financing with a substantial down payment and a responsible, credit worthy buyer tends to be a secure investment.  Sure, you can play the stock market and maybe earn a higher return but that’s more risky.  For many people (particularly retired persons) seller financing on real estate is an important part of a retirement portfolio.

All in all, seller financing on real estate sales can be a good choice.  Ask your real estate agent, consult your accountant, and have a competent attorney draft the documents.