When the Home-Seller Is Also the Lender

Sam Bamieh is asking $29 million for his historic, 35,000-square-foot mansion in the San Francisco Bay area that has been on and off the market for more than 10 years. Earlier this year he put it back on the market, with this financial incentive: If the buyer agrees to finance 40% of the purchase directly with him, he’ll offer a 3.8% 30-year, fixed interest rate and reduce the price to $26 million.

“What is unusual about this deal is the dollar amount, the size, the term and that the interest rate is as low as a 30-year fixed rate mortgage,” said Phil Chen, a luxury real-estate broker at Hillsborough, Calif.-based Sybarite Investments/Keller Williams Peninsula Real Estate, and one of the listing agents on the estate.

Seller financing can seal the deal in some—but not all—high-end markets, said Walt Danley, a luxury real-estate agent affiliated with Christie’s International Real Estate based in Paradise Valley, Ariz. In this form of financing, the seller holds on to the note, which is secured by the property, and the buyer makes principal and interest payments to the seller instead of a bank or other lender.

When the Phoenix-area market was troubled, Mr. Danley says he didn’t see any seller financing. In the past nine months, however, that has changed. “We’ve had so many short sales or foreclosures around here that we have buyers who can’t get a mortgage,” Mr. Danley said. “They are asking the seller to carry the debt till they can clean up their credit and get a mortgage on their own.”

Mr. Danley has closed five seller-financed loans, also called carry-back loans, in the past nine months, all for amounts above $1 million, including one for a $3 million home, he said. In one case, a house that had sat on the market for two years got three offers after an option of seller financing was added, he said.

Typical terms in Arizona are for the seller to carry the loan for five years, but amortize it for 30 years like a 30-year fixed rate mortgage, Mr. Danley said. In exchange for the financing, the seller accepts a higher interest rate, usually prime plus two points, currently about 5.25%, he added. “That’s a much better interest rate than a seller can get at a bank, and it’s good for the buyers in that they can get the house at today’s lower prices,” he added.

Indeed, some sellers, especially retirees who have paid down a mortgage, see seller financing as an income generator, said Dawn Rickabaugh, a Temple City, Calif.-based real-estate broker who specializes in seller financing. Ms. Rickabaugh also purchases carry-back notes.

With jumbo loans now easier to get, however, buyers may not need to use seller financing as an alternative, said Guy Cecala, publisher of Inside Mortgage Finance, which tracks loan originations. “The availability of jumbo financing, at least up to $5 million, is pretty easy to come by,” he added.

Some more considerations for buyers and sellers entertaining seller financing versus a traditional lender-based jumbo mortgage:

• Include a buyback clause. Like a lender, a seller can sell the loan to an investor, but borrowers can protect themselves by including a clause in the mortgage agreement granting them first right of refusal to buy the note at the same discount offered by any buyer, Ms. Rickabaugh said.

• Underwater doesn’t matter. Lenders require appraisals, but in seller financing, the deal comes down to whether the buyer will accept the seller’s price and terms, Ms. Rickabaugh said. On the other hand, if the seller is asking an above-market price, buyers can leverage an appraisal to negotiate a lower interest rate, she added.

• Get professional help to qualify. Sellers always should have an experienced accountant or lawyer assess a buyer’s creditworthiness, Mr. Danley said. “A Realtor is not qualified to look at a credit report,” he added.