Archive for April, 2016

Benefits and Burdens for the Buyer When Seller Financing a Home

April 21st, 2016

Seller Financing is also called owner financing, contract for deed, or seller carry back. When you use seller financing to buy a home you pay the seller monthly until the seller is paid the agreed purchase price of the home. This is called an installment sale. No bank is involved. The seller receives their money over time as you pay them.

Terms of the sale are generally negotiable. You can negotiate the sales price, down payment, interest rate, monthly payments and whether or not there is a balloon. See balloon payment under suggestions you should consider.

This is not rent to own. You own the property from day one. If you fail to pay the seller on time, pay property taxes, or keep the property insured, the seller has the right to take the property back and you will lose your down payment as if you borrowed money from a bank.

Benefits

You own the home. You live in it while you pay the seller.
You can build equity through appreciation and by paying down what’s owed to the seller.
If you sell it you get to keep the difference between what you still owe the seller and what you sold the house for minus your closing costs.
You get to deduct the interest you pay the seller on your income tax return.
You get to deduct the property tax you pay on the property on your income tax return.
You can leave the home to you family.
You can sell the property at any time.

Burdens

You must make payments to the seller just as you would have to if you borrowed money from a bank to buy the home. If you miss payments the seller can take the property back.
You are responsible for paying the property taxes.
You must keep the property insured.
You are responsible for the maintenance and repairs. For instance, if the roof starts to leak or the hot water heater goes out, it is your responsibility to fix or replace it. You own the home, not the seller. This is an added expense you must consider.

Suggestions You Should Consider to Protect Yourself

Use a title company and get title insurance to assure there are no undisclosed liens and that the seller has a legal right to sell the property.
Record the agreement in the county the property is located so everyone knows you own the property.
Make sure the agreement is in writing.
If your state has a standard seller financing form, use it.
Use an impartial third party like an escrow company to collect the payments and hold the release of mortgage or deed. That way you will have a true and fair accounting of your payments and you won’t have to track down the seller when you pay the home off.
If you are unsure about the value of the property, then get an appraisal.
Hire someone to do a home inspection.
If your agreement calls for a balloon payment, then make sure the property, and you, can be financed in the future by a bank. A balloon payment is where you must pay the seller a lump sum of money in the future in order to pay the property off. If you can’t pay the balloon, then you will lose the property and any equity you have built up. If you or the property cannot be financed in the future, then don’t enter in to an agreement that requires you to make a balloon payment.
Use a REALTOR® and/or attorney.