Seller Financing Might Not Be A Bad Idea: Part 4

Here are the pitfall of seller financing basically there are only two.

1. You might not get a good candidate.  As mentioned previously, you can get a loan agent to qualify your buyer/borrower to avoid getting into that situation.  Also, review the application yourself to get a sense of the applicant.

2. The borrower might not make the payments.  That’s the worst case.  You need to react quickly if the monthly payments don’t come in or on time.  You impose a late fee and if it carries into the next month.  Start foreclosure on the property.  There are companies to handle the paperwork or an attorney to get you through the process.  There will be costs and stress but you’ve got a cushion from the borrowers down payment.  The sooner you resolve the problem, if it leads to foreclosing, the sooner you can resell the property and find another borrower the finance.  The next time you’ll get a better borrower and get another down payment.

There is risk in every investment but with seller financing, the benefits outweigh the pitfalls.

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Seller Financing Might Not Be A Bad Idea: Part 3

Here are some advantages to seller financing.

1. Steady income.  You can set the payment to 20-30 years.  Better yet, you might want to make the payments into a 30 year amortized due in 5 years.  That way you can renegotiate the loan with the borrower after 5 years.  You might want to attach a prepayment penalty to the loan.

2. Pay less taxes.  If you sell the property and do not do an exchange you are subject to tax on the sale.  Contact your tax person or CPA for information on this  but basically, if you don’t do anything, you are going to pay tax on the sales price and if you finance to the buyers you pay tax on the down payment and the mortgage income you get from the loan.

3. You get out from being a landlord to being a lender.  A lot less work.

4. You can charge a higher interest rate than what’s available through conventional lenders.

5. You might get a better return verses a depositing the cash in a savings account or other investment at this time.

6. Less risky than other investments.  Generally the higher return, the higher risk.  Your income is secured by property.

7. You are helping a buyer who may not otherwise qualify to buy your home.

In Part 4  I will cover the risks and what can be done to avoid them.

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