House Rich, Cash Poor
by Kara Stefan
Your parents paid for braces, college and maybe even your first car. Now, on the brink of retirement, they're a bit short but resist taking money from their children.
Well, where there's a family house, there's a way to help: seller financing.
|What to Put in the Contract|
The purchase price
The down payment
The term of the contract
The interest rate
A description of the property that serves as collateral
Any penalty fees for late payments
"It's a good tool if you've safely invested your money," says Jay Wood, principal at William E. Wood Associates real estate agency in Smithfield, Va. "If an owner can finance a piece of real estate and get 8% or 10% out of the buyer — it's a little more risky but a substantial increase over 5%."
Even so, the risk is pretty small. If the buyer defaults, he loses everything he's paid into the property. "You basically foreclose on your own property," Wood adds.
The transaction works like this: The buyer pays a down payment, the seller takes a loan directly from the buyer and the house is transferred. There is no bank involved. The seller simply takes the promissory note instead of the full cash amount and the buyer agrees to a monthly payment.
There are a lot of benefits to seller financing.
First of all, by offering to carry the note, sellers may attract a broader range of prospective buyers.
Seller-financed contracts often command a high down payment, interest rates of 8% to 10%, and significantly shorter terms.
This gives the seller a large chunk of cash upfront and longer-term annuity income that benefits from the tax treatment of an installment sale.
And if the seller wants to be free of the arrangement, he can turn around and sell the contract at a discount.
But remember, this kind of sale works best when the seller owns the property outright or has a small mortgage that can be paid off with the buyer's down payment.
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