Are you “cra-zay” to consider seller financing to get your home sold?

In the current hey day of tightened lending standards, parties to real estate transactions are becoming increasingly clever in trying to close real estate transactions. More often I am working with sellers who are being asked to and who are also willing to back a percentage (some times a large percentage) of the purchase price. Are they cra-zay? Maybe.  Maybe not.  What I will commit to is that sellers who participate in seller financing without an attorney are nuts.  Here’s why:

Without an attorney, no one is truly acting in your best interests. Think about the players.  Real estate agents, title agents, bankers, brokers, the list can go on.  All these folks want the sale to go through and have a monetary stake in it actually closing.  I have lots of good real estate agent friends (shout out to you all!) who I trust implicitly.  The good ones would not let you proceed in seller financing without at least recommending attorney involvement.

An attorney will not only assist in properly drafting or reviewing any loan documents, but will be the devil’s advocate/Debbie Downer reminding you of the worst case scenario.  Although I want my clients to get the result they want, ultimately they pay me for solid legal advice and the ability to make informed decisions, not for pure act of closing the deal.

Yes, I said worst case scenario and there is one. The real estate agents I deal with directly want to run interference and soften the blow to my clients on this one, but its crucial to consider the worst: If you participate in seller financing, expect not to get paid and consider your loan for what it might ultimately be: a reduction in purchase price. Seriously? I know it sounds harsh, but I think it is the only safe way to look at the deal.  It doesn’t mean don’t go through with it, it simply means be comfortable enough with the risk to proceed.

If your buyer needs seller financing, it is almost always going to be because they first exhausted their options with traditional banks.  The two big reasons why they didn’t qualify for traditional financing: 1) they are a bad credit risk or 2) the collateral (your property) is not good enough security for the amount they are looking to borrow. Now they are coming to you and asking you to be their piggy bank because they recognize your weakness: in this market you want to sell and are willing to take a risk the banks (who do this professionally) are unwilling to take.

I also can almost guarantee you the bank providing the primary financing will require you to subordinate your interest so they get paid first.  Great, if you’re paid or if there is adequate equity in the property.  If not, in a foreclosure situation you will be forced to forgo your interest in the property, take a reduction in it, or be forced to buy out the first bank.

If you aren’t getting paid, the options aren’t great, but can be improved. To the extent you are taking a business risk, make sure it is as secure as possible. An attorney will make sure that your loan documents are properly negotiated and drafted and that you fully understand your position.  I also counsel my clients on finding other potential collateral, properly securing the collateral they have access to, and negotiating proper interest rates and maturity dates.

Have I scared you away from seller financing yet?  Maybe not, and in some fact situations I hope not.  What’s important is for you to be informed. If you don’t believe me about the “reduction in purchase price concept” of seller financing  at least buy into the fact that the additional cost of attorney assistance is a worthwhile “cost” of seller financing.

For the purposes of this post, “seller financing” should be defined as a promissory note secured by a mortgage or other collateral.  In future posts I will discuss contract for deed transactions which are another form of seller financing.