Seller Financing Risks

For those who can afford it, seller financing offers a unique opportunity to monetize a non-performing asset, reap potentially significant tax advantages and enjoy the advantages of homeownership. Unfortunately, while these deals look great on paper, the risks give even the savviest investor pause - there are seller financing risks.

All seller-financed deals share one common element: Trust. The seller trusts the buyer to make timely payments, properly care for the home and maintain a sound financial profile (and credit history). The buyer trusts the seller to transfer title without undue hassle, maintain a sound financial profile and deliver the property in as-promised condition.

Should either the buyer or the seller default on the deal’s terms, life-changing headaches ensue. If the buyer misses payments, then the seller must proceed through legal channels to evict the buyer and foreclose on the loan, an expensive and time consuming process. The seller must hope that the buyer kept the home in good condition – and this doesn’t always happen.

On the other hand, the buyer trusts the seller to make timely payments on his own mortgage (if the seller still has one). Imagine the legal nightmare of discovering that your seller defaulted on a loan secured by the home that’s supposedly yours? Also, if the seller doesn’t transfer title as promised, ownership difficulties (and title problems) arise.

Finally, even if the buyer makes payments as promised there is no guarantee that the buyer will successfully secure a new loan at the end of the financing period. What if the buyer loses his job or encounters medical difficulties? What if the seller desperately needs capital and can only raise it by selling his investment – your house?

For these reasons, buyers and sellers must protect their hopefully-friendly transaction by hiring themselves legal representation. Covering all the bases in advance helps ensure a smooth (and ideally profitable) sale for everyone.