The Pros and Cons of Financing the Buyer

One of the issues some homeowners want to discuss when we first list a home is whether it's a good idea to offer to finance the buyer. In other words, the seller would act as the lender in the purchase of the home. There are only certain circumstances under which we advise a client to consider this.

Advantages of Seller Financing

A slow market is the best one in which to consider financing a buyer because it may help the home to sell faster. Of course, you’ll want to weigh this advantage against some of the disadvantages mentioned below.

If you structure the deal wisely and get the right buyer, you stand to get a much higher return on your investment than you would with other assets.

Finally, if you have a hard-to-sell property, owner financing may be the way to go. These properties include fixer-uppers, homes in poor locations, homes with incurable defects (such as the layout), and homes that are damaged from deferred maintenance issues.

Disadvantages of Seller Financing

In a fast-moving seller's market, there is really no reason to offer financing on the home, other than that you want to make a little extra money off of it. Even then, we would caution against it. There are too many dangers inherent in seller financing, the worst of which is that you'll be on the hook for the mortgage payments if the buyer doesn't pay.

Another disadvantage is that your equity is still tied up in the house, because you won’t be paid in one lump sum as you would in a conventional sale.

Finally, even though the house is no longer yours to enjoy it is still technically yours. This means you’ll need to ensure that the taxes are being paid (either directly or to you), insurance remains in force, and routine maintenance is performed. The buyer can bail at any time and leave you on the hook for the ramifications of non-performance on all of these items.

If you’re toying with the idea of offering owner financing, we urge you to consult with a real estate attorney who can give you an in-depth look at what’s in store and help you structure a deal that protects you.