Seller financing is useful for two situations. First, when the property is difficult to finance. Second, when the buyer is difficult to finance. In the latter case, the rate should be well above the market rate to compensate for the additional risk you acquire and the costs of a more likely foreclosure. The more questionable the buyer, the higher the rate. I would never seller finance for a rate that is one percent above market rate. It's just too much risk and hassle.
Your local real estate investor's association might have members that use seller financing for weak buyers that could help you. Title companies often have standardized documents, suitable for your state. You will likely need a title company for the transfer anyway.
Our realtor has recommended we ask $595K for our place. If we do that and get full asking price, which may be possible in this market, after realtors' fees we'll net ~$559K. The potential buyers we showed our property to a couple of days ago are friends of a friend. They are a super-nice, young couple who really loved our property and seem really interested in buying it. I told them we may be willing to owner finance for them at $600K if they can come up with at least a $200K downpayment. It seems to me that with that much "skin in the game" they would be relatively unlikely to default on the mortgage, because if they did, they'd lose their downpayment.
The wife is a veterinarian, the husband is a farrier and they've got 4 horses, which is why they love our place because it's perfect for horses. We haven't gone into the financial details with the couple yet, but they've told us that they've been looking for a place for awhile, and that they've been turned down by a bank/mortgage company for a loan on raw land where they'd been hoping to build a home. Apparently getting a loan on raw land is hard no matter how good your credit is, so it may not be that they have bad credit. My guess is that, since they're relatively young (maybe mid 30's), the wife may still have big student loans outstanding from medical school, which may make it harder for them to qualify for a big mortgage.
Our property is probably worth more than $595K. Our home is super well built and everything was built to code or better, but we didn't get permits for an addition (~40% of the total square footage of the house) we added in 2012, which our realtor says means it probably won't appraise for >$600K. We could get permits for the addition and some other unpermitted outbuildings on our property, which would bring up the appraisal, but it would probably take a year(s) of dealing with bureaucrats, which isn't very appealing to us at this stage in our lives. We'd rather take a little less money and let the new owners deal with the bureaucrats to get permits if they want to.
If we get a $200K downpayment, I was planning to put it all into VTSAX and just leave it there to grow. Financing the remaining $400K at 5% would bring us $20K/year in interest payments which, supplemented as needed by savings, we were planning on living off of while we slow travel around the world for a couple of years. To me, a $400K loan, secured by real estate, seemed like a nice diversification away from equities.
As you can probably tell, we have no experience with real estate other than the current property that we own and are about to sell. If we go through with the owner financing of $400K, that will be about 45% of our total net worth, so it's pretty important that we not lose it. I just figured that if the couple defaults on the loan some years down the road, we can just take the property (which we love) back, live in it for awhile, and then resell it to another buyer...
Does this make sense? Any advice/suggestions would be greatly appreciated. We're supposed to talk with the buyers again later today.
@anotherreader, if you wouldn't owner finance for 5%, in our case, what do you think would be a fair interest rate?