Buyers Credit & Seller Financing
If a seller is considering providing the financing to make a deal happen it is almost certain the buyer has some dings on their credit. Lots of people do. Some of the problems may be trivial, others are deal killers. It can be VERY hard to tell which is which.
With the current recession in the housing industry this is likely to be an even bigger problem than normal (whatever that is). For example, buyers frequently need owner financing as a “bridge” while they wait to get their previous home sold. In the not so distant past, that sale and the anticipated price were reasonably predictable. In those cases the buyer and seller could create owner financing with a short term balloon and both feel comfortable about paying off as soon as the property sold.
That comfortable situation no longer exists. With the drop in home prices the buyer may no longer have any hope of selling their former home at a profit. In fact, they may owe significantly more than they paid.
One of the really painful facts which people have forgotten in good times is that losses on the sale of a home are NOT deductible. Everyone knows that profits from the sale of a home are tax free which has been wonderful for years. The other side of the coin is going to be a really ugly surprise.
In my experience, people with stable jobs and credit history are extremely poor judges of a potential buyers credit. They simply do not understand or appreciate how irresponsible, and irrational “buyers” can be. Nor do they know what clues to look for when (if) they check the buyers credit report.
{ 2 comments… read them below or add one }
I own my home outright, but owe on property that I would like to sell. Would it be advisable to borrow the money (against my home), and pay off the propery (that I want to sell) in order to owner finance.
I can’t/won’t tell you what to do, but here are some things you might want to think about. I assume the property has no improvements which the buyer could damage/steal.
Is the sale price you anticipate for the property greater than the loan amount? I ask because in these economic times there is lots of property “under water” in terms of realistic value. Before offering to pay off the property note you will want to see if you can negotiate a discount for early payoff. With the current events in the real estate and financial markets cash is king, so it might be possible to negotiate a sizable discount for early payoff. Of course, you have to get that set up before the person/institution you are paying knows you plan to pay them in any case.
If the buyer quit paying would you be in danger of loosing your home?
Would such a sale create any estate complications within your family? For example if one heir needs cash and another prefers income it can quickly lead to problems.
Are you certain you can get a home loan at acceptable rates?
New home loans come with a lot of closing costs and other expenses. Make sure you take a sharp pencil to all the costs and benefits to be sure the transactions work as well as you think they do.
Keep in mind that if you try and sell that note on the property you will most likely have to accept a LARGE discount (50% off the remaining balance would not be surprising.)
It could be a good deal, just make sure you have throught it through carefully; and involve an attorney when/if the time comes to actually take action.
Good luck