Seller financing image via Shutterstock.
While the residential real estate market is generally believed to be improving nationwide, some of the residual effects of the Great Recession still affect the ability of real estate agents to facilitate home sales.
Emerging employment opportunities in many parts of the country are bringing workers into new communities. Even though financial institutions have brought reserve levels back to all-time highs within the past few years, banks are unable to fund loans due to restrictive lending criteria.
For buyers, the regulatory pendulum has swung too far. Though fully capable of making payments, many are marked with imperfect credit or low cash reserves as a result of short sales, foreclosures or plummeting values of their prior residences. For sellers, this means a significantly smaller pool of potential buyers, which negatively impacts their home values as well as their financial well-being.
According to the Pew Research Center, about 10,000 people will turn 65 every day for the next 17 years. With baby boomers entering retirement at an exponential rate, many are looking to their homes as an additional source of revenue to supplement Social Security or other insufficient income.
Today’s rising home values present a perfect opportunity for sellers to capitalize on their homes’ increasing market values, and savvy real estate agents recognize the prime opportunity that seller financing presents. The trend of tight lending standards combined with willing buyers, sellers and an appreciating housing market is certainly not permanent, so this nontraditional financing option must be quickly leveraged to yield maximum benefit.
The decision to pursue seller financing may be influenced by additional factors, such as:
- Streamlined process: By avoiding investor requirements, appraisal guidelines and other legislative hurdles, as well as disclosures and notices, seller financing provides a streamlined, less rigid financing process.
- Increased returns: By funding the loan themselves, sellers may be able to negotiate a higher selling price, as well as more favorable interest rates and terms.
- Residual income: Sellers receive a steady source of monthly income from the buyer in the form of installment payments, enabling them to significantly reduce their tax burden by limiting their financial gain to the income received during that individual tax year.
Adding value to servicing
In some respects, a seller-financed transaction is perceived as an easier or more convenient method of conducting a home purchase transaction. However, effective management of the deal’s intricacies is vital to its overall success or failure. Many sellers fail to consider what lies beyond the sale of their property to truly consider the level of responsibility that they take on following the sale.
As the lender and the servicer, the seller assumes all of the accompanying operational and legal responsibilities tied to the mortgage. This includes managing the amortization schedule, as well as assuming all supporting provisions, such as tracking and reporting owed balances and interest paid, payment collection, notifications, and even storage and document handling.
While there is no formal certification requirement to execute a seller-financed transaction, formulating a deal between the two parties requires more than just an understanding of the overall process — it necessitates the ability to facilitate a clean, cohesive transaction.
The increasing frequency of seller-financed transactions has established the need for specialized servicers that have the expertise and technology needed to effectively manage the deal. By engaging a professional servicing company, sellers and buyers can both rest assured that the loan terms are being upheld and managed without fear of liability on either party’s behalf. In addition to worrying less about managing transaction details, the buyer and seller both benefit from working with a servicer that has the skill and resources needed to successfully and compliantly manage:
- Payment disputes: Using a servicer ensures that payments are received and disbursed by a neutral third party using standardized accounting practices. This way, the parties are less likely to dispute the time of receipt or the interest calculations.
- Payment of underlying loans: A licensed servicer has systems in place to forward payments directly to the lender, greatly reducing the risk of misapplied or improperly credited payments.
- IRS reporting: Associated liabilities carry serious financial implications and can occupy much of the seller’s time and resources. Hiring a servicer also saves the seller valuable time otherwise spent on reporting interest paid to the IRS.
- 24/7 online account access: Online access to loan servicing information allows the client to track payments and disbursements and monitor the loan balance on an ongoing basis.
- Electronic payments/ACH deposits: Sellers often have other priorities and obligations that make it difficult for them to manage the ongoing check mailing and deposit process. In some cases, servicers offer this service at little or even no charge.
- Reserve/escrow accounts: Contracting with the servicer to handle tax and insurance payments frees the seller from managing time-consuming fund disbursements and balance analysis, and greatly reduces the potential for liability or loss.
- Original documents: By securely retaining the original documents, servicers provide an accessible central document repository.
As evidenced by continued year-over-year declines in mortgage origination balances, the housing market still faces an uphill battle. Though lending remains inaccessible to many, seller financing increases activity within an otherwise muted market by restoring opportunity to able buyers and willing sellers, providing a viable a financing alternative for both parties. The convenience provided by a seller-financed transaction is further increased when a servicer is employed to handle the many important components of the deal, and much like the transaction itself, both buyer and seller benefit from their involvement.
To take advantage of this rare market opportunity, forward-thinking real estate professionals should consider learning more about the servicing companies that provide loan management services for seller-financed transactions. If real estate professionals can help their sellers understand that it’s fairly easy to set up and manage a seller-financed transaction with the right servicing partner, there will be more opportunities to facilitate sales that might not otherwise take place via traditional channels.
Jenifer Walton has more than 25 years of real estate industry experience, including 20 years as an escrow officer and six years as a branch manager with the Fidelity National Financial family of companies. Walton joined LoanCare Account Servicing in 2010 and currently heads up sales for the company’s Seller Finance division. Contact her at email@example.com.