Tips for Selling Property Using Seller Take Back Financing

Using Seller Take Back financing can be an excellent way to sell your property quickly and at a good price. As conventional financing becomes even more costly, more difficult to obtain and more time consuming, Seller financing will become even more popular. (We estimate that approximately 15% to 20% of property sold is now sold with Seller financing.)

If you're thinking about selling some property and taking back financing, here are some things you should know that could b beneficial to you in the future... especially if you want to sell the mortgage, trust deed or land contract for cash someday. The way a mortgage is planned and written can have a lot to do with it sales value in the future.

The Purchase Price - The purchase price is negotiated between you and the Borrower, but there are some objective standards the can be used as the basis for negotiation.

One method is to have three different Realtors do a market analysis on the property, complete with two or three "comparables each. (Comparables are properties that are comparable to the subject property and can be used to determine its market value. An average of these three analyses will usually give you a good idea of what the property should sell for. This service is often free since the Realtors will be competing for the right to list you property. (Be advised, though, that Realtors may overestimate the value of your property in order to win the right to list it.)

A second method is to hire an independent appraiser to do a complete appraisal on your property, which would include (as above at least three comparables. This method is more expensive (from $150 to $600) but is also more authoritative.

The Down Payment - The down payment should be as large as possible. A larger down payment means the Purchaser has more equity and owes less, both of which make the contract more secure and thus more saleable. Remember, the larger the down payment, the more your loan is worth. Make sure the down payment is paid out of the Borrower's pocket, not his or her parents' pockets. Politely but firmly ask where the money for the down payment is coming from and make your selling decision accordingly.

Finally, avoid "nothing down" ($0 down payment) Borrowers. Making no down payment is a shrewd way to purchase property but a poor way to sell it. Making down payments over time ($1,000 today, $1,000 in six months, etc.) is just another version of the $0 down Borrower. Consider carefully: Do you really want to sell to a Borrower who is unwilling or unable to financially commit himself or herself to the property?

The Interest Rate - The interest rate on your loan should be close to interest rates currently charged on mortgages by banks and savings and loan associations. There are legal maximums in most states. See your attorney for details.

The Monthly Payment - The amount of the monthly payment is determined by the amount of the loan, the interest rate and the term of years (5, 10, 15, etc.) The higher the amount of the loan and the interest, the higher the payment. The shorter the term of years, the higher the payment.

Loans can be structured, interest only and a balloon (see Section on Balloons), or for a longer term of years and a balloon. This keeps the Buyer's payment manageable and gets the Seller paid off in the desired time. If you need any assistance in structuring this type of payment plan, please call us.

Taxes and Insurance - Lending institutions generally require the buyer to pay one-twelfth of the estimated yearly real estate taxes per month and one-twelfth of the estimated insurance costs in addition to the monthly payment. At the end of the year, the money is on hand to pay the taxes and insurance. This is also your wisest strategy. Since the loan will run over a period of time, there is always the chance property taxes will be raised. Be sure to include a clause that provides for increasing the payment when this happens.

Underlying Debt - If you currently owe on a piece of property, you do not necessarily have to pay off your present land contract or mortgage. Instead, you can sometimes continue to make monthly payments in the required amount just as before. (The original obligation is often referred to as "underlying debt" since it "underlies" - is superior to and existed before - the debt owed to you on the more recent sale of the same property.) However, check the mortgage you are paying on to see if there is a so-called "Due on Sale" clause requiring you to pay off the debt if you sell the property.