Anyone ever *sell* a place with seller financing?

[waltworks]

If so, how did you set it up? What interest rate as compared to prevailing market rates, what terms for length/DP/balloon, etc?

Is there an effect on capital gains or other tax considerations if you are mostly being paid over the course of, say, 5 or 10 years?

We have a house we might want to sell in the next year or so that is all but paid off (ie, 85+% equity) and we don't want or need a giant lump of cash all at once for a variety of reasons. It also seems like an opportunity to make the house a bit more attractive to buyers (ie, offer 5% seller financing or something).

Anyone ever do it?

-W

[Metalcat]

Posting mostly to follow because I'm interested in the answers.

But my instinctive reaction is that the only people I know who want private mortgages are folks with bad credit who can't qualify for conventional mortgages.

I know very little about private lending though, so that's why I'm curious what more informed responses will be.

[uniwelder]

Also posting to follow.  I don't have useful information to share.

I would think vetting would be critical for the type of property up for sale.  If it was a higher end home, I would assume purchasers would be more likely to maintain it.  In a poor/rough area, selling to a first time owner, I'd be worried about default and taking possession of a home that has been totally trashed.  I've been amazed at how much damage people can do to a home they own.  Its likely those cases involved 3-5% down payment, rather than 20%+.

[oldladystache]

Back in the 1960s my parents sold a house that way.

The buyer gave them a down payment of a big stack of 20 dollar bills. He made the payments like clockwork until suddenly the payments stopped coming.

They found out he was in jail for counterfeiting. $20 bills.

They got the house back and sold it again.

[uniwelder]

Back in the 1960s my parents sold a house that way.

The buyer gave them a down payment of a big stack of 20 dollar bills. He made the payments like clockwork until suddenly the payments stopped coming.

They found out he was in jail for counterfeiting. $20 bills.

They got the house back and sold it again.

Interesting story.  I can imagine slipping a counterfeit bill at the grocery store, among other cash.  Assuming the stack given to your parents was counterfeit as well, how does that quantity go unnoticed?  Did they not deposit it at the bank, who would presumably notice they were fake?

[waltworks]

I would think vetting would be critical for the type of property up for sale.  If it was a higher end home, I would assume purchasers would be more likely to maintain it.  In a poor/rough area, selling to a first time owner, I'd be worried about default and taking possession of a home that has been totally trashed.  I've been amazed at how much damage people can do to a home they own.  Its likely those cases involved 3-5% down payment, rather than 20%+.

Agreed. In this particular case it's a $2million+ house. My thinking (which may be way off base) is that you'd offer similar terms as a conventional mortgage (ie require 20% down, high credit score, etc) but offer a lower interest rate. But I wouldn't really want to give someone a 30 year mortgage, either....

It might be easier to just offer to buy down the buyers rate, which is commonly done right now as I understand it.

-W

[oldladystache]

Back in the 1960s my parents sold a house that way.

The buyer gave them a down payment of a big stack of 20 dollar bills. He made the payments like clockwork until suddenly the payments stopped coming.

They found out he was in jail for counterfeiting. $20 bills.

They got the house back and sold it again.

Interesting story.  I can imagine slipping a counterfeit bill at the grocery store, among other cash.  Assuming the stack given to your parents was counterfeit as well, how does that quantity go unnoticed?  Did they not deposit it at the bank, who would presumably notice they were fake?

They did take it to the bank, and it was OK. We decided he had probably exchanged it for good bills with someone in the business of passing counterfeits. At a discount, of course.

[belly05]

We have been on the other end of this equation, buying a property from a seller who financed it.  In our case the transaction worked out really well for everyone!

The seller of the property carried 50% and we financed the other 50% with a local bank.  The seller carried the loan for 3 years, and then there was a ballon payment at the end of year 3.  Seller offered us 2.75% (this was 5 ish years ago when interest rates got super low - so they were really just offering us a little better than market rate). For the seller this allowed them to finish out their working career and then get a big lump sum right after they retired and their tax bracket drastically lowered.  For us, we were able to purchase the property with way less down payment than if the entire thing had been financed with the bank, we also had super favorable terms for the first 3 years. 

[LifeHappens]

My DH and I sold a weekend cottage through seller financing. It was a second home in a slow market, so we were doing the buyer a significant favor helping them buy a weekend home, but also incentivizing a sale. I forget what we received as a down payment - somewhere between 10-20%. At the time mortgage rates were 4% or less and we charged 5% per year for three years. After that, the buyer was required to refinance and pay off the remainder of the sale price.

It worked well enough and got a house sold in a tough market. I would never do it if there are quicker options. For one thing, you are paying income taxes on the interest you receive. For another, you are exposed to extra layers of risk if the buyer stops paying, can't refinance, etc.

[bacchi]

In-laws sold a rental to an owner-occupant this way. It wasn't a courtesy for the buyer but instead to spread out income over 10 years.

[Dicey]

Don't know if this will be helpful, because it happened so long ago. When I was in college, my slightly older AF veteran boyfriend bought a house this way. IIRC, he rented it for a year and then the owner wanted to sell. BF bought it with ? down. Terms were 7 years interest only, with a balloon payment due at the end. I believe that made the monthly payment about the same as the rent. He sold it after about 6 years, paying the original owner in full and making a nice profit for himself.

This was many years ago, but I believe the seller structured it this way for favorable tax treatment.

[Villanelle]

How does foreclosure or repossession work for a home?  Do you get the home back and have to sell and pay the former buyer whatever you get that is over what they owed?  That would be an important detail for me. And I'd definitely want a large downpayment in case they trashed the place, as well as proof they were paying property taxes (or might even try to set up some kind of escrow account for that). 

My parents sold my grandpa's home (after he passed) to a neighbor.  (IIRC, the neighbor bought it for a family member so they could live next-door.)  The carried the loan for many years.  I'm guessing it was 30, or at least 20.  I don't know the details.  The home was modest and in a medium COL area (or a low COL, by California standards).  IDK why my parents decided to finance it, but it worked out well for them.  I dont think the buyer ever missed a payment.  My mom was thrilled when he made the final payment, only because he paid by depositing into a BoA account, and my mom loathed BofA and had so many headaches with them, and she was thrilled to be able to finally close that account.  Her celebration about that is the only reason I know the approximate timeline of the loan and that is lasted at least a couple decades. 

I also bought a home that was owner-financed, sort of.  My dad inherited his mom's condo, and my newly-married husband and I bought it from him. We would have easily qualified for a loan, but dad offered to finance it.  He liked the idea of our money staying in the family, so that the family got the interest, instead of a bank.  We paid FMV for the house (with a slight discount since there was no realtor involved) and paid the going rate for interest.  (My sister had just refinanced and dad and I agreed to just use the interest rate she got, since our situations were similar enough that it was a safe assumptions our rates would be as well.) We set up a lien on the property, formal payment terms, etc.

When we sold that and bought our next house, instead of paying off the loan, we just applied to the new house.  We got a regular loan, and then the family loan was second, with a new lien against the new house.  At one point, rates dropped and we decided to refinance and I asked dad if he'd rather we pay off the loan, or refinance to the lower rate with him.  He chose the latter.  We still have that loan today.  My parents get a monthly check (which they don't need, but that's not relevant).  Every year at tax time, we confirm with them that we both have the same number for our interest paid.  Everything is above-board and official. 

[Finances_With_Purpose]

I would think vetting would be critical for the type of property up for sale.  If it was a higher end home, I would assume purchasers would be more likely to maintain it.  In a poor/rough area, selling to a first time owner, I'd be worried about default and taking possession of a home that has been totally trashed.  I've been amazed at how much damage people can do to a home they own.  Its likely those cases involved 3-5% down payment, rather than 20%+.

Agreed. In this particular case it's a $2million+ house. My thinking (which may be way off base) is that you'd offer similar terms as a conventional mortgage (ie require 20% down, high credit score, etc) but offer a lower interest rate. But I wouldn't really want to give someone a 30 year mortgage, either....

It might be easier to just offer to buy down the buyers rate, which is commonly done right now as I understand it.

-W

That's what I would do.  Talk to a lawyer, frankly. 

We've had family consider but never do it because of the foreclosure/eviction risks involved.  (OTOH, I had a longtime friend who made his living with these sorts of arrangements as an investor, so there's that.)  You have to own the risk of foreclosure/eviction/default problems if you do it, whereas you can get rid of all of that risk if you just do a buy down. 

[LifeHappens]

proof they were paying property taxes (or might even try to set up some kind of escrow account for that). 

This was definitely written into our agreement. The buyer had to show receipt of property tax payment and maintain an appropriate amount of insurance on the property.

[sailinlight]

I've done this twice, once with family once with a stranger. For family we gave them a better rate than the bank would, but also more than we'd make in a CD. Second time was for someone who went through a divorce and had bad credit. We charged a slightly higher rate than banks were offering. Both times, we required a balloon payment clause forcing them to payoff the loan within five years. I'd recommend that so you're not forced to keep $2MM locked up for the next 30 years. You could always extend or renegotiate every five years if both parties agree.

[Prancing Llama]

In the early 80s my dad bought his first house owner financed. The rates were like 17% back then and owner financing was 10%. Its my understanding that besides tax advantages its also an incentive in times of high interest rates which makes it difficult for traditional mortgages.

In the 2014-2021 time period it was almost exclusively for bad credit people or rent to own. But I've noticed a few more, as I'm looking at houses and would consider doing it. I don't know if interest rates are high enough for it to be super common though.