Roanoke Times Copyright (c) 1995, Landmark Communications, Inc. DATE: SUNDAY, May 6, 1990 TAG: 9005070370 SECTION: HOMES PAGE: D6 EDITION: METRO SOURCE: ELLEN L. JAMES THE BALTIMORE SUN DATELINE: LENGTH: Long
"Seller financing can be a good deal under the right circumstances," says Douglas Bregman, a real estate lawyer and author. With buyers scarce in many U.S. communities, seller financing could give you the selling point you need to unload your property at a fair price.
But don't consider becoming your buyer's mortgage banker unless you've thoroughly checked the buyer's financial background, Bregman cautions. "You've got to look under a lot of stones and know who you're dealing with," he says.
Before accepting the out-of-state couple's offer, for example, the author looked over their tax returns, statement of earnings, credit reports and certification from banks that they did, indeed, have large sums in their bank accounts.
Confident of their financial standing, she signed the contract, agreeing to lend the couple $200,000 for seven years at 10 percent interest.
Seller financing isn't catching on in the early 1990s the way it did in the early '80s, when mortgage rates rose to the high teens and so-called "creative finance" became an economic necessity for many seeking to buy.
But even when moderately priced mortgage money is widely available, as it is now, seller financing can save thousands of dollars in costs for a buyer. Buyers are typically spared the need to pay upfront mortgage interest or points. (A point is 1 percent of the mortgage amount.)
What's more, they don't have to pay hundreds for a host of miscellaneous charges so often associated with loans from commercial lenders. Besides survey and appraisal fees, many commercial lenders throw a host of other charges into the pot at closing. They may impose a "lawyer review fee," a "document preparation fee" or a "tax service fee." Lenders have a variety of names and explanations for such fees.
Sellers who lend to their buyers usually don't impose a lot of "Mickey Mouse fees," as the miscellaneous lender charges are known.
"There could be a tremendous savings to the buyer, when you add it all up, allowing the seller to compete in a tough market," Bregman says.
Furthermore, a lot of the falderal involved in the usual settlement process can be eliminated in a well executed seller-financed deal. "The formality of the lending process is largely eliminated, and what you have at the settlement table are just two documents to sign, a deed of trust and a note," says Bregman, who co-authored The Common-Sense Guide to Successful Real Estate Negotiation, a book published by Harper & Row.
Obviously, a seller contemplating making an offer for financing has to seriously consider whether he has the wherewithal to do such a deal.
"I don't think we have that many owners that can afford to do it. Most people use their equity to trade up to another property," says Richard Purvis, an executive of Coldwell Banker Residential Real Estate, a nationwide realty company. Generally, it's the well-heeled or those trading down to smaller properties who have the means to act as a mortgage lender, he says.
But even those who can't afford to make a big first mortgage on the home they're selling may be able to kick in with a relatively small second mortgage for the buyer. A second mortgage of, say, $10,000 to $20,000 could be a real plus to a buyer lacking a hefty down payment, Purvis observes. That's because many buyers with good incomes are frequently low on cash.
"This generation of baby boomers is a cash-short generation," Purvis says.
By helping the buyer financially, the seller may also be helping himself. Taking back a mortgage could be "an attractive investment at 9 or 10 percent interest, certainly much better than passbook savings," Purvis says. "Typically, this appeals to a retiring couple or a couple with available funds to invest."
Taking back a mortgage can also give you a better price for your property than would a plain vanilla sale. You can assume that on a seller-assisted deal, a property will sell close to market value or possibly above, says Arthur E. Davis III, a realty firm president.
Some sellers may also benefit from seller financing through the deferral of capital gains, say tax specialists.
You can defer or reduce a capital gain on the sale of your home by buying a home of equal or greater value within two years. You can also enjoy a one-time exclusion on payment of a capital gain of up to $125,000 if you have lived in your principal residence for at least three of the five years before the sale and are age 55 or older.
But if you're too young to enjoy the one-time exclusion and plan to move into smaller quarters or a rental unit, the deferral of capital gains through seller financing could well suit your tax situation, according to tax experts.
Still, it's wise to think through the implications of providing seller financing. Are you willing to go through the potential hassles of collecting monthly mortgage payments and accept the prospect, however unlikely, that the seller might default on your loan?
Although your loan would obviously be secured by the property, foreclosure could prove costly to you in attorney fees and auction costs and become a messy, time-consuming situation.
"It could be devastating if the borrower did a lot of damage, ripping up the carpets and letting the dog claw at the window sills. Then when you go to sell, no one will be interested in buying the property at a good price or you'll have to buy it back yourself. Either way, you could lose a lot of money on the house," Bregman says.
Davis, the realty company president, suggests you reject any prospective borrower who couldn't qualify for a mortgage through a commercial lender. Your realty agent should be able to tell you whether the borrower meets the standard qualifying ratios and credit guidelines required in the open market.
But don't assume that your offer to take back a mortgage on a property will attract only deadbeats, since many sophisticated people with plenty of money and sparkling credit ratings realize the financial advantages of buying property this way. And you can greatly reduce the risk of a bad situation if you handpick your buyer.
"It's possible to attract very good credit risks," says Bregman, though he notes that when sitting around the kitchen table with a would-be seller, it can be awkward asking for tax returns, verification of assets and other documents.
Realtors are usually disinclined to suggest that a client consult an attorney to forge a real estate deal. But not when seller financing is involved. With so much at stake, you'll probably need a lawyer to make sure the papers are properly drawn and that your interests are represented, says Purvis, the Coldwell Banker executive.
"I'm not an attorney and I don't like attorneys. But in this particular area I think you need one," Purvis says.