I want to do seller financing?

[Lalalauren]

My husband and I own a home that has a 2.75% interest rate on a 15 year mortgage. The mortgage has 11 yrs left on it. We had to move away and will either rent or sell our property. If we sell, we think it would be advantageous to do so in such a way that we become “the bank”. Has anyone done seller financing before? What steps did you take? What would you caution us about? What should we know? TIA!

[Glenstache]

Ive been a buyer with seller financing and also looked into being the note holder for other transactions. I think the key is to be realistic about the value of that asset in your risk portfolio if they default and that the contract is worded strongly to allow you a level of protection you are comfortable with. Spend the money on a real estate attorney to draft this. It will probably be on the order of 1-2k to do that and it will be worth it. Make sure your rate is market and not a gimme. Ask yourself why the person wants seller fiancing instead of going through a typical mortgage lender. Are there red flags? Are they overreaching? Bad credit? When I did it to buy undeveloped land it was because I got a better rate than I would get from a bank. If the rate is similar for this situation, why would they do it?

In a recent transaction I was considering it as a bridge to avoid a weird contingency action, but I also said to the potential buyer that the rate and dollar value to me would have to be worth taking on the risk and administrative pain. Do your due diligence on why this works for both you and them. In some cases it can work well, in others just walk away.

[Telecaster]

The problem is you become the bank. 

[GilesMM]

You would likely attract buyers who are unable to secure a traditional mortgage loan which means they may have less creditworthiness. Is that a risk you are ready to take? What rate will you charge? What will the term be? Will there be a balloon payment?

[Lalalauren]

Thank you all so much for the reply! @Glenstache - I appreciate you sharing your personal experience, that is so helpful! I spoke with an attorney that I work with today on getting suggestions for how to find the right real estate lawyer for the job! Will start looking for one!

Keep the comments coming, please! Would love to hear more from people with first hand experience!

[MrGreen]

Also, because it's not necessarily obvious, you will have to pay off your mortgage.

[solon]

Owning one note is a pretty non-diversified strategy. What are the chances that you pick an honest, upright borrower that the bank won't lend to? What will you do when they are a day late on a payment? 10 days? 3 months?

[srad]

What's the plan with your mortgage?  you will likely have to pay it off to do this. Majority of mortgages have a clause in them stating loan is due at transfer of ownership. 

[sonofsven]

One thing to consider is that you're basically going in to business with whoever you sell to on a contract. What is their cash flow and reserves?
If they don't make their payments to you, then you need to take action.
If they trash the house and you take possession, you get to deal with the mess.
That being said, I've known multiple people who have sold on a contract successfully, sometimes a five year with a balloon payment (meaning the balance is due in full after five years of payments, often useful for buying a fixer then re-financing once it's loan-able), sometimes longer, like twenty years.
Some people would rather have twenty years of steady income rather than one big cap gains inducing tax hit.
I was trying to negotiate a contract sale on a house my business partners and I built last year. The buyer wanted a lower rate so we settled on 5%, five year ballon based on a thirty year amortization,and a three year minimum term before a re-fi was possible by the buyer, but my partners were skittish, for the reasons I led with. Plus, we all preferred to be cashed out now rather than waiting five years.
I was attracted to the three years of interest (approx $130,000).
Also, the potential buyers were hard bargainers,and one of the partners got a little offended and didn't want to deal with them.
It ended well, we took it off the market and put it back on this spring and it sold with conventional financing, and everyone is happy.

[franklin4]

I have bought two rental properties with seller financing and it has been no issue. I prefer giving a person monthly payments instead of a corporation and feel that is better for society. With the most recent purchase, in early 2023 when rates had climbed, the seller shared their desired terms for seller financing - 30% down and interest only payments at 5.5% for 5 years (lower than market rate at the time). I submitted a financial statement showing solid financials and plenty of experience managing rental property. To beat out another offer, ended up increasing the rate to 5.75 and now have a great property with low borrowing cost.

If you are willing to be the bank you have more opportunity to come out ahead than if you are just the seller. You could offer seller financing at a rate below what a buyer would get conventionally. If you are in a competitive market it might work out to list the house a little low in an effort to get multiple offers. But certainly require a healthy down payment and only sell to someone who demonstrates likelihood of paying as they should, and who would qualify for a conventional loan. And use an agent with relevant experience.