What to look for if selling your home with seller financing

Think rich people pay cash for 8-digit trophy homes? Think again.

According to the Malibu Real Estate Blog, there are 18 homes in the Malibu market where sellers have specifically noted in the MLS listing that they are willing to provide financing to the buyer: "Homes range from $1.1m for a mo-bi-yal home in Paradise Cove to a $10m hillside mansion with jetliner views. There is even a newly remodeled home on Point Dume with tennis court, pool, and beach rights whose owner will carry."

The increase in seller-financing on high-end homes is a direct result of the tightening in the jumbo mortgage market. Without alternative sources of financing, buyers can't buy and sellers can't sell, and that's driving an increasing in seller financing.

But is that something sellers should go for? Or, if a bank won't lend money to a buyer, should the seller take that as a warning sign not to lend his own money? I interviewed Dale Robyn Siegel, a veteran mortgage broker, lawyer, and the author of "The New Rules of Mortgages."

WalletPop: Other than not being able to get a mortgage without seller financing, what are some reasons a buyer might want to buy a home with seller financing?

Siegel: There's a couple big reasons. The first reason is that the closing costs are a lot cheaper. Number two, appraisals, engineering reports, and surveys don't matter. Let's say that the house is not mortgageable. I wanna buy a Victorian mansion and the place is dilapidated and banks won't lend on a house. So I can't get a mortgage. So I take a mortgage out with the seller, put down 20%, and use my cash to fix it up, get a certificate of occupancy, refinance out of the seller financing. If somebody is taking out seller financing and then refinancing it, the bank will want to see that you've owned the home for 12 months because they want to see that you have ownership seasoning. If you own it for less than 12 months, they'll use the purchase price for the refinancing, even if you've improved the house dramatically.

WP: If a bank won't lend money to a buyer, what makes a seller think they know something the banks don't?

Siegel: Because you really wanna sell the house and you're willing to take a chance. To protect against the risk, you need to get a bigger down payment or a co-signer. When I'm helping someone negotiate seller-financing or a private loan, I put together the package just as though I were handing it over to a bank.

WP: I've heard some sellers who are using seller financing tell me that "if he doesn't make the payments, I'll just get the house back and sell it again". Can you walk me through what the expenses associated with that strategy might be?

Siegel: It's not so easy and don't think it is easy. I have a private mortgage; I'm the lender. I have people who owe me money and every month I have to call and email and say "Where's my payment?" I had to extend it out for another year. Why am I working so hard to do this? Because I don't want to have to foreclose. If I'm the seller and my guy stop making the payments, I'm gonna have to go through the entire system of a foreclosure -- that could take a couple years.

WP: Obviously it's an unregulated wild west market -- what are some red flags to look out for for buyers and sellers?

Siegel: It shouldn't be wild west. What I would do to make sure I'm not wild west is get a good lawyer. I would make sure that the loan is treated just like a bank loan. Nothing should be done on a handshake. Whatever state you're in, I would have the actual mortgage documents -- the note, the mortgage, closing costs, title report, etc., make sure everything is recorded. Just because it's private doesn't mean it needs to be sloppy.

WP: Do you think this seller financing has the potential to lead to another housing problem, as all the sloppily underwritten seller-financed mortgages run into trouble?

Siegel: No, I don't. I don't think the volume is there.
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