Senior citizens, many of whom own residences free and clear of debt, face a real dilemma. On the one hand, they’ve raised their children, paid off their mortgages, and many are ready to downsize to a more flexible rental arrangement. On the other hand, with interest rates continuing at historic lows, they won’t get much of a return on the cash that will be generated from the sale of their residences. Is there a solution?
One Potential Solution: Seller Financing
While it won’t succeed in every instance, owner/seller financing may be a solution. Popular in the 1960s and 70s, the practice fell out of favor during recent decades as easy money from mortgage companies allowed virtually anyone to get a residential mortgage loan. Now, with some lenders requiring as much as 30 percent or more down, many young couples are finding it difficult to get residential financing, even if they have good credit.
And so, seller financing is enjoying a bit of a comeback. Under the appropriate circumstances, it can be a win-win situation: Providing the seller with a more generous return than the seller could otherwise earn in most short-term investments, and providing the buyer with terms that are still manageable, after the buyer makes a meaningful – say 10 to 15 percent – down payment. The younger couple gets the house, and the senior citizens get the income flow.
With Proper Terms, Sellers Can Manage Their Risks
As with any real estate transaction, there are some risks for the parties, particularly the sellers. But with careful planning and guidance, those risks can often be managed. Here are some tips for the sellers:
Since The Seller is a Lender, Act Like One
Have the buyer(s) complete a thorough loan application. Don’t take their word for their credit score, but rather get a copy of the full report yourself. Check behind the information provided. Is the employment information accurate? Don’t be afraid to ask for a recent tax return.
Get a Proper Down Payment
Where a buyer has no “skin in the game,” there is a much greater chance of a default. Get a reasonable down payment – at least 10 percent. If you have to take action against the buyers, this will give some cushion.
Make Sure that the “Loan” is Secured by the Residential Property
The commercial lender would require a first lien on the property. Make sure that you get that, as well. Also, make sure that the buyer purchases sufficient fire and hazard insurance, and make sure that the seller is listed as a beneficiary. The same goes for property taxes – make sure that the buyer pays them each year.
Seller Financing is Not a Do-It-Yourself Arrangement
With the right terms and the right documentation, seller financing can be an excellent solution for the senior citizen who wants to sell, but is concerned about the fact that short-term rates are often only a quarter of one percent. A five percent return, secured by the value of the house that you know so well, may be just what the doctor ordered. You can’t do this alone, however. You need the help of a skilled, experienced real estate attorney.
Blado Kiger Bolan, P.S. Has the Requisite Experience to Advise You Regarding Seller Financing
Blado Kiger Bolan, P.S. has over 50 years of combined experience in real estate matters in Washington State. We have represented many sellers over the years, and have crafted seller financing arrangements, where it met the needs of the client. We strive to find simple solutions to complex issues, and we are prepared to give you the best representation possible. Before it was trendy, we worked collaboratively, both with clients, and also with other attorneys in the firm. That way, our clients can benefit from the many strengths that our attorneys can bring to bear on an issue. For assistance with any type of business issue, contact us on the web, or call our Tacoma office at 253-272-2997.