Should you carry the financing for a buyer?
Julie Garton-Good, GRI, DREI

The buyer makes you an offer. The price is good and he's generous with the earnest money deposit. But there's one hitch. He's asking you to carry seller financing for him. What should you do?

As with any other offer from a prospective buyer, it's important to consider what you stand to gain (and potentially lose) by accepting the offer. Let's assume that you have no immediate need for all of the cash and you're motivated by the possible extra yield on your sales price that you could gain by carrying financing for the buyer. Are there any other considerations before saying yes? Absolutely.

Here are some tips for deciding whether or not you should carry financing for the buyer.

1. Ask if the buyer has been prequalified with a lender. Find out why he isn't using traditional financing. The first tenet of assisting a buyer is to know that he has strengths like stable employment and a good credit history--requirements not unlike qualifying for a lender loan. Why then would a buyer ask you to carry financing if he could otherwise qualify for the loan?

There may be temporary roadblocks that are standing between him and obtaining traditional financing. For example, he may be several months shy of having the required two-year employment history required by most lenders. Or perhaps he has first to sell another home in order to have enough money for both the down payment and the closing costs required on a conventional loan. Sometimes the underwriting guidelines required by traditional lenders can be just too restrictive, even for an otherwise OK buyer.

2. Is the down payment ample enough that the buyer will be motivated to follow through and not default? Losing only a small down payment might not be sufficient motivation for a buyer; and if you have to take the property back, it might not cover the repairs and maintenance required to get the house back in shape.

3. Are the terms the buyer is proposing fair? For example, if he offered a moderate down payment, you might offset it with a higher-than-market interest rate. Or if his hot button was a certain monthly payment, you might counter by requiring a larger down payment and a balloon payment after a period of time. Seller financing is about trade-offs. But remember--you'll have to live with the terms and conditions of the agreement until the last payment is made. So make sure you get terms you're comfortable with.

4. If you do consider carrying financing for the buyer, make sure you're represented by a real estate attorney. Yes, it's fine if the buyer has his own attorney. But this is no time for you to be cutting corners where legal advice and sound contract writing is concerned. No matter which party drafts the documents, make sure your attorney has ample time to review them and make changes if he deems them necessary.

Seller financing, done for the right reasons and in the proper manner, can assist you in marketing your property while increasing the yield on your purchase price. Ask your Realtor if you should consider it when selling your property.