Seller financing, how to avoid early payoff?

Question

My mother is selling a mobile home on a lot to her neighbor and is offering seller financing (California). The agreed upon purchase price of the property is $150,000 with $10,000 down. She would like to have a monthly payment for 15 years and is concerned about the possibility of an early payoff. What are some ways to structure the contract to dissuade early payoff? Also, they haven't agreed on interest rate/monthly payment amount, does anyone have an opinion on a property like this or is there somewhere I can look to determine seller financing rates in a particular area? Thank you in advance for any advice.

Chris Seveney · Answer

@Robin McMullen

You can put in a prepayment penalty that would include required to pay all interest but chances of them signing it are slim and if it’s owner occupied you would be open to a lawsuit since I don’t believe it is legal.

There is no way to stop someone. She would be better off getting cash and sticking it in a cd as it’s zero risk compared to getting 8-9% interest and potential for borrower to default with only putting 7% down.

Rachel H. · Answer

@Robin McMullen Usually, lenders add in a prepayment penalty clause in their documents to discourage early payoffs. Though, I'd weigh the pros and cons of an early payoff especially if your mother is elderly and nearing retirement.

Receiving the cash before the note is due may be a positive thing, depending on your mother's situation.

Hope that helps!

Bill B. · Answer

Unless the interest rate is 8% or higher she should just sell for cash and put it in a 5-6% CD with guaranteed payments.

No buyer should ever sell with a high interest rate and a per-payment penalty. So only way to get a pre-payment penalty would be to charge an insanely low rate like 4-5%.  As mentioned if the buyer is going to live there, be SUPER careful and get a lawyer. She could end up losing big if anything is unusual.

You could talk to a lawyer/real estate expert about a lease. We used to sell expensive computer equipment with a $1 buyout. That way buye could write off payments as expenses. Don’t know if that’s still legal/done.

Seller financing, how to avoid early payoff?

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