Q: I’m wondering if it would be easier to sell our house if we offer owner financing to buyers. How risky is that? What about all the legalities? We have a real estate attorney. Will we need anyone else to help us with the documents?
A: You can arrange owner financing through your attorney or through a site like VirginMoney.com.
To determine your risk of default with your potential buyers, you need to interview the buyers, determine what kind of people they are, what type of jobs and income they have, the odds that they will continue to be employed and look at their credit histories to see if they have a history of paying their bills on time. Once you sell the home, you’ll be like their bank and if they default you’ll have to sue foreclose on the home to get the house back.
What you have to think about is this: People with bad or even mediocre credit can’t get loans that easily at the moment. But interest rates are still low. If you want to take on someone with a perfectly awful credit score, and not charge that much in interest, you might find someone good who is just momentarily down on his or her luck.
Or, you might get someone who does the deal, moves in, trashes the house, strips it clean, and moves out. Yes, you get back the property, but now you have to clean it up and find someone else to buy it.
Down Payment Reduces Owner Financing Risk
This kind of thing works if your buyers have cash to put down on the home. Ask for enough of a cash down payment that the buyers would be unwilling to walk away from the home. Sometimes the amount you’ll want is 30 percent or even 40 percent of the purchase price of the home (hint: you’ll want more of a down payment the lower a credit score your buyers have).
But in many cases, sellers don’t ask for a large down payment or buyers don’t have it. Now you have to assess a new risk: If your buyers put down very little money, your risk in having a buyer with almost no skin in the game in the current market environment might be quite a bit higher than the buyers’ risk of losing a small down payment.
Finally, please consider obtaining a credit report on the buyers from at least one, and preferably all three, of the major credit reporting companies. You’ll want complete credit information on each buyer (husband and wife, or partners) who will be listed on the mortgage.
Your real estate attorney can walk you through the process if you decide to move forward, but I’d tread carefully.
Published: Oct 9, 2008
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