As the credit markets continue to shrink, and access to credit tightens up further, some of our clients are turning to seller financing, which is sometimes acceptable in small real-estate transactions. Indeed, the WSJournal reports that large commercial real estate transactions are also including seller financing as an option.
According to the commercial real estate brokerage firm Marcus & Millichap estimates that as many of six (6%) of the deals it tracked this year involved seller financing to the buyer. [See article].
Seller financing is not for the weak of heart or slight of pocket book, however, because mom and pop real estate seller (now lender) will be in the position of the bank and have to shell out money to foreclose should the purchaser not pay the mortgage.
There are ways to mitigate such non-payment situation, not all good, but speak to a real estate attorney in Dutchess, Rockland, Westchester, Putnam or Ulster.
For example, you could do partial seller financing, but you would be second in line or “subordinate” in a liquidation to any primary lender the buyer enlists. That means that if the property must be sold in a bankruptcy or some other workout situation, the primary lender must be fully paid off with the proceeds of the sale before the seller gets anything for the financing it provided. Be sure the property appraisals are adequate before you take that risk.
You could consider holding a deed in lieu of foreclosure to secure your repayment and retake the property.
You could consider leasing the land with an option to buy.
But think about it, if the buyer isn’t credit worthy for a bank, why is the buyer credit worthy for mom and pop seller.
The bottom line– hire competent local New York real estate counsel if you are considering a seller financed deal and be aware of the risks involved.