On Real Estate & More – May 2024

SELLER FINANCING can be a useful tool when mortgage loans are difficult to qualify for or when interest rates are high. This alternative type of loan may help sellers move their home faster and get a considerable return. Buyers can benefit with typically less rigid qualifying requirements, sometimes more favorable interest rates, and better loan terms. A home that seemed out of reach for the buyer might be possible after all.

Seller financing allows a homebuyer to purchase a property by making an initial down payment, then making direct payments to the seller. While Oregon law has rules in place to regulate property sellers who handle a significant number of seller-financed transactions, the process is relatively simple for Oregon home buyers and sellers who enter into a home sale without using a traditional lender.

A key factor that helps to make seller financing an option is if a seller has either no loan, or a very small loan remaining on the property to be sold. Most home loans now have what’s called a “due on sale” clause, which means a seller’s home loan must first be paid off upon the sale of a property.

These loans are often short term—for example, amortized over 30 years but with a balloon payment due in three years. The theory is that, within a few years, the home will have gained enough in value or the buyers’ financial situation will have improved enough to refinance with a traditional lender or pay off the loan in full. From the seller’s standpoint, the short time period is also practical. Sellers do not usually want to be exposed to the risks of extending credit longer than necessary or their financial situation may have changed over a longer timeframe.

One other factor for sellers to consider when thinking about seller financing is if they’re okay with monthly payments instead of receiving a lump sum. Some sellers greatly prefer the income of proceeds from their home sale over time, instead of in one payment. That said, if the seller carry involves a balloon payment, there will be a lump sum paid to the seller at the end of the agreed upon term, often several years or much longer.

But not all sellers are willing to take on the role of lender. That is because a seller carry transaction has legal, financial, and logistical hurdles. But by taking the right precautions and getting professional guidance, sellers can reduce their risks by ensuring the following:

Allow for seller approval of the buyer’s finances. The written sales contract—which specifies the terms of the deal along with the loan amount, interest rate, and term—should be made contingent upon the seller’s approval of the buyer’s financial situation. The seller can ask for whatever they need to feel comfortable: a credit report, verifying employment, assets, financial claims, tax records, etc.

Have the loan secured by the home. The loan should be secured by the property so that the seller can foreclose if the buyer defaults.

Require a down payment. A down payment provides the seller with a cushion against the risk of losing the investment and makes a buyer less likely to walk away if they have financial troubles. Sellers often collect at least 20% of the purchase price. Otherwise, foreclosure could leave the seller with a home that can’t be sold to cover all the costs.

Insurance. One other condition for sellers to be aware of is homeowner’s insurance. The seller may want to be named on the policy so if there is a loss, such as a fire, the seller has a priority to insurance compensation.

Collection Escrow Account. One very convenient service often used is called a collection escrow account. In Southern Oregon, collection escrow companies can receive payments from the buyer on behalf of the seller, while tracking them, then forward the payment to the seller. This is helpful to have a state-licensed firm keeping track of payments and providing year-end tax statements.

As with any business agreement, things can and sometimes do go wrong. One of the more important factors for sellers to consider prior to entering into any seller financing agreement is a possible default by a buyer, who simply cannot continue making payments as agreed. In this case, consultation with an attorney is a good move. Sometimes a temporary restructuring can be agreed upon, or a mutually agreeable exit strategy to provide the buyer a pathway to meeting the agreement.