Seller Financing Terms

[Brandon Bass]

I think this falls under private lending but let me know if this shouldn't be posted here.

I have one of my rental properties listed for sale. I received an offer to sell it for full price with seller financing. I can see the benefits of seller financing but I've never done one of these so I'm proceeding with caution.

Here are the terms of their offer:

415k Purchase Price (full price), 20% down

Finance the remaining 332k at 8% amortized over 30 yrs with a 3 yr balloon

2 Questions:

1. The buyer intends to occupy the property. This will be my only seller finance transaction. Does Dodd-Frank / SAFE apply or not? Is there any issue with the short ballon?

2. What assurance do I have, if any, that the buyer will adhere to the terms and make the payments? Is loss of his downpayment the only incentive? He won't let me credit check him and I suppose it wouldn't look good if I did. His Realtor says a lot of good things about him for whatever that's worth, and says he's done a few of these as buyer and seller. Sounds like a leap of faith on my part.


Thanks!

[Chris Mason]

So that person can't get a mortgage. Otherwise, they wouldn't be coming out the gate offering you staggeringly worse terms (for them) than they could get if they called me, or someone like me and could qualify. 

Honestly, if I'm in your shoes and only since THEY brought this up, AND have 20% down, I'd offer a rent-to-own. Instead of a 3 year balloon, they've got a 3 year clock, and I'll agree to tell the home at today's price within those three years, and count a portion of the (slightly above market) rent towards the price. They also take over all routine maintenance, starting now. There's already a bunch of existing content on the advantages of rent-to-own (pay particular attention to the option fee, refundable if/when they actually execute on the purchase), and I'm generally not a huge fan of it, but it seems to make sense in this particular case specifically because it's your home in particular they want, and they have 20% down.

I did not pick 3 years out of the blue. For someone that has 20% down but can't get a normal mortgage, by far the most common culprit is that they are self-employed, but "creative" when they do their taxes, meaning they show little income to cut down on the tax burden, but those tax returns are what lenders rely upon to determine if this person can make the mortgage payments. In all conceivable scenarios, three years is sufficient for them to find Jesus, get a little more honest on their taxes, and then be able to qualify for a mortgage. 

It's also possible they are asking for seller financing because they have horrible credit, in which case you wouldn't want to extend credit to that person anyways, so you're welcome for steering you away from that mine field. :)

If real estate goes up 20% or 50% in the next three years, you're no worse off on the "aw shucks" front compared to if you just sold today, so no big deal there, since nothing additional is lost that wouldn't been lost anyways, by selling in 2022. And if real estate goes down (who knows), you will feel quite good about that 2022 sales price in 2025... they might not want to buy at that point, but hey you get to keep the option fee and above market rents you collected, and you get to keep the savings from not having to take care of routine maintenance during those 3 years.