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The most expensive risks when offering seller financing

On Behalf of | Feb 26, 2023 | Firm News |

The real estate market is not very forgiving for those with unusual circumstances. Those who unexpectedly lose a job or have sustained harm in an accident may struggle to secure financing for some time afterward.

Those with children, pets and/or disabling health conditions may have a hard time making rental housing work for their circumstances. They also may struggle to qualify for traditional financing. Seller financing helps provide a crucial service for a large number of those with steady income and responsible payment histories despite having mediocre credit or difficulty obtaining a mortgage. However, it also means assuming two major risks.

Property damage is a serious concern in seller financing situations

Some people buy a property with good intentions but simply can’t maintain it the way they should. They do not invest enough in the property, and so it does not maintain its value or remain in appropriate condition.

There are also others who may cause real damage to property. They may have pets that tear up the carpeting or angry teenagers who punch holes in love drywall. When a seller provides the financing for a real estate transaction, the home someone moves into is the collateral for the loan. If the buyer defaults on payments, the seller can get the house back.

Sadly, it may not be worth as much as it once was because of damage to the property. To add insult to injury, the foreclosure process can often be quite expensive and further increase the losses a seller could suffer if a buyer doesn’t follow through on a seller-financed transaction.

Foreclosure, when necessary, is slow and expensive

The seller can also arrange to avoid the costly and time-consuming foreclosure process by having the buyer fill out special paperwork to allow for a faster process where a new deed gets recorded without any technical foreclosure proceedings.

Sellers stand to lose a lot of money if a financing property purchase doesn’t result in the home transferring to the new owner because they have completed all of their payments or secured secondary financing to pay off an initial seller financing agreement.

There are numerous means of reducing the risk involved in a seller-financed transaction. Including a large down payment helps drive a bigger sense of investment in the property. However, the seller may want to also establish a portion of that as a deposit on the property in the event that possession reverts to the seller due to foreclosure.

Protecting against damages and foreclosure expenses will minimize the risk involved in seller-financed residential real estate transactions. As a result, it is important to be proactive when offering this service that can be life-changing (in the best possible ways) for potential buyers.


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