What Is Seller Take-Back Financing?
The real estate market is on fire, and banks are writing more mortgages than ever. For some, however, bank-led financing is not an option, due to an inability to qualify for a mortgage. Fortunately, transactions with banks are not the only way that property deals happen. Seller take-back financing is also used. But what is seller take-back financing exactly? Here is what you need to know about this path for buyers to qualify for properties previously out of reach.
What Is Seller Take-Back Financing?
Exactly what is seller take-back financing in Washington, and how does it work? Seller take-back financing occurs when the owner of a piece of real estate finances the sale of the real estate, instead of a bank or other outside party. It is a convenient method of handling real estate transactions under certain circumstances but comes with certain risks that can typically be mitigated with the aid of an experienced real estate lawyer.
More specifically, the seller essentially offers the buyer a private mortgage and holds a purchase money note for the loan between themselves and the buyer. To secure the loan, the seller has a deed of trust on the property. This practice is also known as a seller-carried transaction. (anchor text for new page)
The Purpose of Seller Take-Back Financing
Seller take-back financing serves as an alternative for the many good-faith buyers out there who cannot qualify for a mortgage through traditional channels.
Some reasons why certain buyers are unable to obtain mortgages include:
- Poor credit and poor credit history
- Cash-flow problems
- Employment verification issues
- Income verification issues.
When seeking a standard mortgage, buyers with problems in any of these areas have a tough time or find it impossible to acquire adequate, reasonable financing.
The Benefits of Seller Take-Back Financing
The benefits of seller take-back financing vary depending on whether you are the seller or the buyer in Washington. For the buyer, the main benefit of seller take-back financing is the ability to acquire real estate without a traditional mortgage through a bank. Sellers typically do not have anywhere near the requirements that banks do and tend to be more lenient and understanding of traditional mortgage disqualifiers, such as lack of employment and other seemingly problematic issues. Additionally, buyers are typically required to produce far less documentation in transactions of this nature.
For the seller, going with a seller take-back financing option is often more lucrative than the traditional route. For one, the seller can sell their property at a higher price than it would be sold for through standard channels. Given that the balance of power in seller take-back transactions overwhelmingly favors the seller, sellers can easily demand higher sales prices.
Sellers may also benefit by charging a higher interest rate than banks. Doing so allows them to mitigate the uncertainties involved with risky buyers who otherwise cannot obtain mortgages with banks and other lenders.
Finally, seller take-back financing results in much faster closing times than standard mortgages. Because there are no banks involved in the mortgage, the escrow closing time can be drastically shorter.
Potential Problems With Seller Take-Back Financing
As with any financing option, there are some problems with seller take-back financing, especially for sellers. The main issue, of course, is the risk of entering into financial arrangements with potentially problematic buyers. The buyer’s inability to obtain traditional financing gives most sellers pause, causing them to fear results such as:
- Late payments
- No payments
- Short payments.
However, sellers can simply raise the price of the property and financing rates to compensate for the risk, although this may not be enough to offset the risk in certain circumstances. For example, seller take-back financing involving construction projects on raw land is particularly risky, because the buyer could default on the land loan mid-construction, leaving the seller with a half-built property to finish or demolish.
Mitigating the Risks Involved in Seller Take-Back Financing
All real estate transactions come with a degree of risk. In other words, it is impossible to have a 100% risk-free real estate deal. However, it is possible; anyone entering into a somewhat risky real estate deal should hire an experienced real estate attorney for guidance and protection. The added cost of an attorney is worth the freedom it can help buy from future problems for both seller and buyer.
Although there are other things buyers and sellers can do to reduce their risks, such as title searches, credit checks, and the like, hiring an attorney is typically the most effective for covering all bases.
Important Basic Details of Seller Take-Back Financing
If you are considering entering into a seller take-back financing arrangement, there are some basic details about these transactions that you should be aware of:
- Mortgage terms typically favor sellers.
- Sizeable down payments are typically required.
- Balloon payments are common, which are large one-time payments made at the end of a loan or mortgage.
- Mortgage term lengths for seller take-back financing deals are typically much shorter than term lengths for traditional mortgages.
Additionally, both the seller and buyer should be aware of the tax-planning strategies and tax implications involved with seller take-back financing.
A Real Estate Lawyer Can Protect Your Interests
Seller take-back financing is a convenient way for many to buy and sell real estate in Washington. Without having banks involved, those who could never qualify to buy a home or other property may finally be able to do so; some caution must be taken, however, due to the lack of institutions involved. An experienced real estate lawyer can help ensure that you are adequately protected and provide you with the proper guidance throughout the process.
Dickson Frohlich Phillips Burgess has been safeguarding the rights and financial interests of clients in and around Puget Sound for over 25 years. If you need guidance and protection for a deal involving seller take-back financing, reach out for a consultation, and let’s discuss your options. Call (206) 621-1110 in Seattle, (253) 572-1000, Tacoma, and (360) 742-3500, Olympia, or (971) 416-0881 (Portland) today to schedule an appointment.