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Overcoming the pitfalls of seller financing for real estate

| Apr 12, 2021 | Real Estate |

Selling your own property is a way to maximize the returns that you make on the transaction. If you don’t work with a real estate agent, you won’t have to worry about paying someone a certain percentage of the sale price. Additionally, if you choose to offer owner financing, you can access a much larger group of potential buyers.

Those who don’t quite qualify for standard home financing can still have the income and resources to become responsible homeowners. Offering owner financing lets you work with people who have lower credit scores or down payments. Of course, financing a property on your own comes with its own set of risks. How can you potentially minimize the risk you take on when you finance the sale of your own property?

Protect yourself from the risk of damage to the property

Regardless of how you structure your owner financing, you will want to include language in your contract that makes the purchaser responsible for maintaining the property and its crucial systems. You may even want to include a requirement for you to inspect the property annually and the right to demand certain repairs.

You may also want to require a large deposit that represents 5% or more of the property’s value. That amount will go toward the purchase unless the buyer defaults and doesn’t complete the transaction. In that scenario, it can help offset any damage to the property.

Consider delaying deed recording

One of the most frustrating parts of having a buyer default can be the need to record a second deed and get the property back in your own name. You may want to delay the recording of any deeds until the buyer has at least 20% or more of the property’s value established as equity in the property.

An alternate approach to protecting yourself could include having them execute a deed in lieu of foreclosure that you have the right to send in for recording after they miss a certain number of payments.

Set up an escrow system so that the property isn’t vulnerable

When someone buys the property, they are the ones who have to pay for homeowner’s insurance and taxes. However, given that you have financed their transaction, you take on significant risk via the potential loss of the collateral property if they don’t pay their taxes.

The same is true of scenarios where someone can bring a large personal injury claim against the new owner because they got hurt on the property or in a situation caused by your buyer. Setting up an escrow system helps ensure that there will always be sufficient funds to pay real estate taxes and to purchase necessary coverage to protect the property and its owner.

Determining exactly what protections you need often requires a careful analysis of your financial and legal situation. From support with drafting a contract to help in the language used in your deeds, the support of an attorney familiar with the unique needs of seller financing arrangements can help you avoid the worst risks involved with this type of sale.

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