Seller financed mortgages can provide you with great returns if you are in the position to carry a private mortgage, for your buyer.
Not everyone, of course, can choose this option.
If you are in a position to offer finance assistance for your buyer, this will give you several advantages.
Here are some advantages of seller financing mortgages.
Let's look at an example:
You the seller, hold a 1st mortgage for the buyer of $150,000.00 at 6.0%, amortized over 25 years for a 5- year term.
- In 5-years you will have made $42,885.26 in (taxable) income.
- The remaining $134,898.13 becomes due to you at the end of the 5 years.
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If you had invested that $150,000.00 at a safe 2.5% over 5 years, your (taxable) income would be $19,971.53.
There is a small sector of the home buying public that are reliable but can't qualify for a regular home loan.
If you offer these people financed assistance if they buy your house, you have a very captive audience.
- Having special privileges such as seller-financed mortgages, usually comes at a price. In many cases, there is not a lot of bargaining going on with the buyer. They are just grateful to find a way to purchase a house.
- As a holder of seller-financed mortgages, you can usually ask a higher interest rate than other lenders may offer.
Some Suggested Rules
If you are in the position to carry seller financed mortgages, here are a few suggestions.
- If they are self-employed, ask to see their books. Don't be shy, if they are going to be financed by you, you have the right to this information.
If they have 10% down, you might want to consider them, depending on market conditions.
- If the buyers have no money down, you might consider offering a "rent to purchase" option.
How About 2nd Mortgages?
2nd mortgages have both advantages and additional risks.
Two advantages of carrying a 2nd are:
The big disadvantage is in the name, 2nd mortgage. You would be 2nd in line should the buyers default on the payments. This is never good news if things get messy.
The 1st mortgage holder, a bank or other lender forecloses on the 1st mortgage and sells the property.
As long as they get all or most of their investment back, they are not really concerned, or worried about your 2nd position.
Mortgages, as I'm sure you know, are very "front-end" loaded. In other words, the largest portion of the interest is in the first payments and then gradually decreases over time.
This is what makes holding the paper such a good money maker.
Having said that, a seller will usually hold the debt for one term of say 3 to 5 years.
They then expect the buyer to be in a position to get a traditional mortgage through a regular lender and pay the seller the balance due in full at that time.
How to Draw up the Paperwork
The documents can be drawn up by a real estate lawyer who is qualified and competent.
The documents will be laid out basically the same as any mortgage document that you would receive from the bank.
You would have all the same privileges as a mortgage lender, including being able to foreclose on the buyer, should they default.
Remember, this should be a win, win situation.
You get to invest your money at a high rate of interest return and the buyer gets the privilege of owning a home that they wouldn't be able to purchase without your help.
I've seen this work out very well many times, including my own personal experience.
This page on seller financed mortgages is a broad explanation of some of the things that are involved.
If you decide to look into the possibility of carrying a 1st or 2nd mortgage for a buyer of your property, you should seek financial advice from a professional in that field.
My suggestion is that you also retain legal advice from a lawyer who is familiar in the field of mortgages.
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