|Should you carry the financing for a
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?
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
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