Seller (Owner) Financing - Couple Questions

[Archie Minkowski]

We have a home in a desirable area and a couple of folks have asked if we'd consider owner financing, so we're considering it.  We would obviously ask for a down payment, proof of income, and proof of insurance.   We'd offer the home at market rate interest or just slightly higher.  

1). How are taxes handled?  

2). Monthly payments. How do we amortize the deal?  Does all of the money go to the principal, or is it counted as "interest only" for a time?

3). Is there a way for us to sell the note down the road and exit the deal?  

Greatly appreciate any wisdom. 

[Ke Nan Wang]

1. Depend on the state either get a real estate attorney or a title company involved to handle the property taxes and doc stamp fees. Then talk to your accountant about income taxes. 

2. Many people can do this. You can create one yourself using any amortization tool and just attach it to the seller financing contract. Whoever you hire to draft the contract should be able to do it. If that person has never done it before, hire somebody else. If that person is you because you would like to save as much money as possible, then you will have to learn how to do it. Your best starting point is either a title company you trust or a real estate attorney. The real estate attorney should be able to handle it all but it will cost a little more. 

3. Yes you can sell the note down the road. Once the note is created, people may approach you to offer to purchase your note penny on the dollar. If you have a great note with stable borrower and a great interest rate, it will be very attractive in the future when interest rate come down. The borrower can also refinance the house and pay you off. If that's not something you want to do, you should negotiate a prepayment penalty in the seller financing contract. 

When you negotiate the terms with the buyer, it benefits you to focus on their monthly payment more and less on the interest rate number. Sell them on the payment, not the terms. 

If everything I'm saying sounds foreign to you, you are better off hire a real estate agent who's experienced in seller financing or a real estate attorney to do the deal for you.