During the past several years, conventional financing has been more difficult to find. So seller financing has made a comeback, and has helped revive deals that were lost. But seller financing presents its own set of challenges.
Here are some tips to help make seller financing a benefit and not a burden.
1. Get bank consent. If you’re buying on land contract or with other seller financing, make sure the seller’s own lenders give their consent. And get that consent in writing. If the seller has an existing mortgage on the property, the lender probably has the right to call their loan due when you buy the property with seller financing. If the lender forecloses, where does that leave you?
2. Make payments direct to the bank. Who says the seller will make the payments on their mortgage just because you’re making your payments? Always include the option for you to make your payments directly to the first mortgage lender to help ensure that the seller doesn’t end up in default on their loan.
3. Check for other liens. A seller may have collected a number of liens against the property you’re buying. With seller financing, those liens may not be paid off at closing. Always confirm that the junior liens are acceptable in your situation.
4. Use title insurance. Some buyers and sellers may try to cut corners and not close using a title insurance company. Even if your seller financing is in the form of a lease-option, you should consider using a title insurance company to confirm the status of other liens and encumbrances and to protect you from the unknown.
5. Make sure your payoff is enough. When you pay off your land contract or exercise your option to purchase, you expect that you’ll receive free and clear title – right? But if the seller had more debt secured by the property than the amount of your payoff, you may not get a clean title. With the challenges that many sellers have faced over the past few years, it’s even more likely that you will encounter a property with this situation. Always confirm the amount of debt secured by the property and make sure it’s less than your payoff.
If you’re wondering how I came up with this list, it’s only because I’ve seen each of these situations nearly create some serious headaches for buyers and sellers alike. While seller financing may seem to be the perfect solution, be careful that it doesn’t become the ultimate problem.
Special Note: This information is not intended to be legal advice – just good business advice. Always consult your own attorney or legal advisor to make sure you’re covered.