L.A. Times, June 24, 1990 – ROBERT J. BRUSS
Suppose you were asked to name the easiest method of financing a home purchase. What would you answer? VA mortgage? FHA mortgage? Assume an existing assumable mortgage already secured by the house?
Those are all good answers. But they are not correct.
The best answer is “seller financing.”
Many prospective home buyers have never heard of seller financing. Surprisingly, many real estate agents have never used it either. Seller financing means that the seller of the home finances all or part of the sales price, so the buyer doesn’t have to go to a bank, S&L or other lender to obtain a new loan.
In other words, the seller lends the buyer the money to buy the home. On Wall Street, it’s called a leveraged buyout. The seller’s security for the loan can be a mortgage, trust deed, land contract, contract for deed, contract of sale, agreement for sale or any other method where the property being sold is the security for the loan.
To illustrate, suppose you are buying a $150,000 house. You have a $15,000 down payment, can handle the closing costs, have a good job and a good credit history. The sellers, a nice elderly couple, own their home free and clear, but they plan to move to a retirement home. Your offer of a $150,000 sales price, a $15,000 cash down payment and a $135,000 seller-financed first mortgage at, perhaps, 10% interest might meet their needs perfectly. The monthly interest payment of $1,125 will give the sellers excellent retirement income and a higher yield than they can probably earn elsewhere with equal safety.
The big advantage of seller financing for the buyer is easy financing. Since the property being sold is the loan security, most sellers don’t even check the buyer’s income and credit history. However, most real estate agents can get a credit report on the buyer, so the seller will know if he or she pays the bills on time.
From the buyer’s viewpoint, a possible disadvantage might be that many sellers will only carry back financing for five to 10 years. However, since most buyers usually don’t keep a home longer than 10 years, this really isn’t a significant disadvantage.
The advantages of seller financing are numerous for home sellers. They include quick, easy sale for top dollar; excellent investment secured by a property the seller knows well, possible double profit if foreclosure becomes necessary and the seller reacquires the home to sell again for a second profit and a higher-yielding investment that is available elsewhere.
The possible disadvantages for the seller include tying up equity instead of receiving cash, possible foreclosure hassle if the home buyer defaults and the risk that the house might drop in market value.
Since the advantages of seller financing outweigh the slight disadvantages for buyer and seller, most home buyers want to know where homes with seller financing can be found. Unfortunately, few real estate listing agents encourage their sellers to carry back a first or second mortgage. So it is usually up to the home buyer to create seller financing.
This is done when making the offer to purchase the home. If the home being sold is owned free and clear by the seller, this is a perfect candidate for seller financing. Or, if the home has an assumable first mortgage, such as one of the older VA or FHA home loans, the buyer can assume that loan and the seller can carry back a second mortgage.
Until the buyer makes a written purchase offer that provides for seller financing, many sellers have never considered the advantages of financing the sale of their home. I will always remember the 83-year-old home seller who carried back a 10-year mortgage when I bought her house.
She told me the $1,033 I will be paying her each month is more money than she has ever earned before in her life. It enabled her to move into an apartment close to her children and to live in financial dignity without have to look to them for support. Until that lady saw my purchase offer on her kitchen table and the real estate agent explained the benefits, I don’t think she had ever thought of financing the sale of her home.
I find the best candidates for seller financed homes are those which have been owned a long time and are being sold by elderly sellers. Another good sign is a vacant house. That usually means the seller is not just testing the waters, but really must sell and will listen to any reasonable purchase offer.
An even better signal of a possible seller financed home is when you learn from the real estate agent that the seller has already bought another home. Chances are, that seller is worried about the old home being vacant and is very anxious to have it sold. Seller financing can solve the problems of both home seller and buyer.