Seller Financing: An Idea Whose Time Has Come

Do you want to sell your house but have figured out that buyers are as scarce as snowflakes in the Arizona desert? If you've owned your home for a long while and have equity in it, your best bet might be to offer seller financing.

Seller financing essentially means that you will act as the bank when the bank won't. It's an idea whose time has come because of tighter lending qualifications. According to the National Association of Realtors, there's already been an uptick in the number of homeowners who carry loans for their buyers.

But a couple of measures kicking around in Washington may unintentionally throw a wet blanket over seller financing -- effectively ending a practice that could actually revive the comatose housing market.
First is the SAFE Act (Secure and Fair Enforcement for Mortgage Licensing). Intended to regulate mortgage loan originators, the SAFE Act is silent about whether Mom and Pop sellers are subject to the new rules. HUD guidelines suggest that as long as you are not being compensated as a loan originator -- paid points and fees and the like -- and the house you are selling is your own, you probably aren't covered by the SAFE Act's provisions. Probably.

And then there's the Dodd-Frank Act, which is working its way through the regulatory process right now. Buried deep in its 179 pages are restrictions that could also cause problems for sellers who want to offer a financing package to whomever buys their house. Dodd-Frank regulations exclude individuals who sell up to three homes in a 12-month period, but leaves a lot of unanswered questions. For example, the new regulations don't exempt the home's builder, so what about folks who had custom homes built for themselves? What if you want to finance the sale of your second home, or an income-earning property you own? All unaddressed -- and therefore unanswered -- questions.

The result of these measures, if only because of the chilling fear they instill, could be crippling. Ken Trepeta of NAR says both measures create a "significant gray area," and that's not a good thing.

Consumers "Kicked to the Curb"

Will people continue to provide financing once these regulations kick in? For now, Vince Scott, CEO of Intero Real Estate Services, thinks owner financing is a great idea.

He says that he's had to go into "creative financing mode" several times for his business as a "fix-and-flipper." Six months ago, he and his partners paid $350,000 for a 2,800 square foot foreclosure in Reno, Nev. They put about $70,000 into repairs and renovations and relisted the property at $549,000. When offers were not forthcoming, they moved to Plan B: providing the financing to the buyer. The house sold quickly.

Scott requires at least 30 percent down on short-term loans of interest-only payments at between 7 percent and 9 percent. "If we can get enough down and the buyer is otherwise credit-worthy but just needs time to get past a short sale -- three years -- this is a good business decision."

In all the cases where Scott has provided seller-financing, the buyer was either turned down by a lender or knew they would be so they didn't bother applying. So far, Scott has not had to repossess a house.

He notes that the foreclosure process in Nevada is faster and simpler than in other states, so if it became necessary to invoke it, he'd get the house back fairly quickly. That said, people being foreclosed on sometimes trash the property and it can take months to physically evict someone, so lending a buyer money is not without risk.

Still, Scott says, it's the right thing to do both from a business standpoint and a moral one.

"Consumers have been kicked to the curb," he says.

And owner financing is an alternative whose time has perhaps come.

"There are plenty of people who have cash on hand, good jobs and pay their bills on time, but got upside down in their homes and let them go," Scott said. "Banks won't lend to them even though they are good credit risks."

Nowadays, Scott says, it's just as much about "neighbor, helping neighbor ... good old-fashioned American Spirit."

That may be, but there is also financial risk involved when individual home owners offer to play banker. Just how safe is it for a home seller to carry the financing for someone who likely couldn't get a loan from a bank, especially if that buyer has a tarnished credit rating because they walked away from another property?