Your success when selling on seller finance terms hinges on choosing the right buyer / borrower, the right deal structure, and protecting your investment from unnecessary risks.

This guide dives into practical steps and financing options to make store you’re successful, profitable, and safe!

“DEALS DON’T DEFAULT; PEOPLE DO”
~ Caleb Christopher

Know Your Buyer

Buyer Character Is the Linchpin

The greatest risk in seller financing isn’t the paperwork—it’s the person who will either make it a priority to pay you or not. 

You’ll need to dig deeper than just a credit score. For example, a buyer who has saved for a down payment, has demonstrated good money management and/or self-discipline. Savings are the evidence of either industriousness (a strong work ethic) or prudent financial control (ability to manage spending). The lack of savings is typically evidence of the contrary.

If you want a business relationship, treat it like one. If you want to be charitable, do so knowing that people rarely betray their patterns and history.

Unfortunately, you’ll meet someone who’s had a string of bad luck and they just need a break. Wisdom asks, “why is bad luck chasing this person… and if I lend to them, will I also be a victim of their bad luck?”

Ask the Tough Questions

• Why are they unable to get traditional financing?

• What does their financial history reveal about their habits?

• Do they have references from landlords, employers, or others who can verify reliability?

What to Look For

• Integrity: Do they follow through on commitments?

• Stability: Is their income consistent? Are they financially responsible?

• Commitment: Are they putting some skin in the game (a large down payment means they’ve got a lot to lose if they default…) Do they understand the importance of their obligation and demonstrate a desire to see it through?

Set Buyers Up for Success

Start with What’s Affordable

Seller financing only works when your buyer can consistently make payments. Instead of asking, “What’s the most I can get?” consider, “What can a person realistically afford?”

Sometimes its best to “back into your numbers” by estimating what a reasonable monthly payment looks like for your buyer and structuring the loan to match that payment. (And don’t forget taxes and insurance! Many deals have gone into default and become unprofitable when the additional burden of taxes and insurance were left out of the equation by both buyer and seller.)

Structure Terms that are Transparent and Sustainable

• Gear your sale price and interest rate to ensure affordability — buyers who can’t afford your terms are more likely to default, costing you more in the long run.

• Make sure the deal profits enough to be worth the risk — foreclosure costs out of pocket, but so do any mortgage, taxes, or insurance that you have to carry during the default…

• Be upfront about what happens if the buyer misses payments.

• Make it clear that this is a business arrangement — not a personal favor — and defaults have consequences.

Use the Right Financing Structure

Review the 3 options below. Note that the pros and cons are not exhaustive, and each deal is unique.

1. Mortgage (or Wraparound Mortgage)

• What It Is: 

  • If you own the property free-and-clear, you’re seller-financing the buyer and creating a mortgage as security.

  • If you still have a loan on the property, you continue paying the original loan while creating a new loan for your buyer that “wraps around” the existing loan. (read more about the types of wrap mortgages here)

• Wrap / Mortgage Pros:

  • Cash flow (if you’re an investor selling for profit).

  • Accountability: You can foreclose for nonpayment.

  • Lock-in your sale price: A market price dip doesn’t affect your sale price… you already sold it and are just getting paid back over time.

  • No maintenance responsibilities: You don’t call the bank when your water heater needs replaced. When you sell on wrap, the buyer (your borrower) owns the house and owes you money for it.

• Wrap / Mortgage Cons:

  • Consumer protection laws are generally in favor of your borrower: Foreclosing on someone’s primary residence can be tougher than if you sold to a non-owner-occupant.

  • If wraparound, the due-on-sale clause allows your existing lender to accelerate the full loan balance, leaving you in a lurch (but you can buy a due on sale guarantee from DOS Guard).

  • You don’t capture any property appreciation.

2. Lease with Option to Purchase

• What It Is: The buyer rents the property with an option to purchase later.

• Pros:

  • Lets you “test” the buyer’s reliability. Easier (and usually faster and cheaper) to evict and repossess the property if they default when compared to foreclosure.

  • You can require them to have perfect payments for a year before they’re eligible for financing from you (and/or bring a large down payment instead).

  • Tenants who have the option to purchase are generally more committed to the rental transaction and take better care of the property.

• Cons:

  • Tenants can be… tenants.

  • You’re a landlord, so you have maintenance, repairs, property insurance, and taxes to pay for.

3. Contract for Deed (Land Contract)

• What It Is: The buyer makes payments and gets all benefits and responsibilities of ownership, except you retain the actual deed until you’re paid in full.

• Pros:

  • You keep title to the property.

  • Compared to a lease option, the buyer gets credit for “owning” the house in the eyes of lenders, which means they’re more likely to qualify for a refinance sooner. (This could be good or bad, depending on how profitable the deal is for you while they’re making payments.)

  • You can foreclose for a default.

  • In some states, you have the right to cause a forfeiture (more like evicting a tenant) rather than having to foreclose. (This usually only applies to the first few years of the contract, or has a dollar limit).

• Cons:

  • Insurance can be confusing and difficult to interpret (who’s liable for a slip-and-fall if title is in your name…?)

Documentation and Professional Support

Leverage Professionals

• Use an RMLO (Residential Mortgage Loan Originator): A RMLO underwrites the borrower (checks their financials and ability to pay) and provides documentation to ensure your buyer meets compliance standards. This also helps you because it provides documentation you can lean on in case you’re accused of predatory lending when the borrower defaults and you move to foreclose.

• Use a Loan Servicer: A loan servicer is an independent third party payment processor for loans. The loan servicer handles payment collection, escrow for taxes and insurance, tracks the loan balance, issues statements and late notices, etc.
  This helps you because the independent third party provides oversight and unbiased recordkeeping, minimizing disputes and protecting both sides.

• Partner-up or pay a Consultant: If you’re reading this page, chances are you could use guidance of seasoned veterans… Partners are helpful, but take a percentage of your whole deal… Consultants provide experiential guidance like partners, but usually only take a flat fee upfront. One tends to be cheaper upfront, while the other is far cheaper in the long run. (Creative TC stands for “Creative Transaction Consultants” — book a call today so we can set your deal up for success or answer any questions you have.)

• Have an Attorney on deck: Attorneys are great at poking holes and helping identify risks. In creative finance, they’re more likely to be the “wet blanket” — and that’s a good thing because “... in an abundance of counselors there is safety.” Proverbs 11:14.
  A good wet blanket attorney 😉 helps you make informed decisions!

Use the Right Paperwork

• Comprehensive, state-specific contract terms.

• Quality leases, promissory notes, and security instruments make the difference between thinking the courts will back you up and wasting your time and money in the first place. You get what you pay for. (Learn more about top-quality docs here - LINK COMING SOON.)

Monitor and Manage the Deal

Stay Engaged and Plan for Defaults

• Check periodically to ensure taxes, insurance, and payments are current.

• Have a clear process for late payments or defaults, and don’t delay in sending late notices and charging late fees — if you don’t take it seriously, neither will your borrower!

• Communicate regularly and be ready to help your borrower help you. If they’re comfortable talking with you, they may be more likely to communicate a problem before it turns into a default.

Remember: You’re a lender in the eyes of the law, and you have to follow certain rules. Leverage your attorney contact in the case of a default to ensure you’re compliant with regulations as you respond.