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2 forms of seller financing that can help when the market softens

On Behalf of | Jul 13, 2022 | Real Estate |

The vast majority of home purchases involve mortgages. A bank or specialized lending institution extends up-front financing on behalf of a buyer that meets specific credit and employment criteria. A smaller subset of individuals purchasing homes may be able to make cash purchases, such as investors buying distressed properties in poor condition in the hopes of repairing them and reselling them for a profit.

There is a large contingent of prospective home buyers who have neither the resources to make a cash offer nor the credit score to qualify for a standard mortgage. Some of these buyers may turn to seller financing options. Especially with buyer demand declining, alternative funding may seem more attractive to some.

There are two common forms of seller financing utilized in Florida, which may become more popular now that interest rates are on the rise.

Land contracts or a contract for the deed

A land contract is a kind of purchase agreement for real estate. The seller agrees to transfer the property for a certain price, but they finance that amount themselves. So long as the seller does not sell multiple properties this way annually, they can do so without any licensing.

A contract for the deed of a property requires that a buyer fulfill certain purchase terms, which often involve making monthly payments followed by a balloon payment after a certain number of years. The risk in such transactions primarily stems from the possibility that the buyer will still be unable to qualify for financing when the balloon payment comes due.

A lease with purchase option

Sometimes, people want to rent and live in a property that they would later like to purchase. A lease with a purchase option is a specialized kind of contract.

Typically, the monthly rental payments will be  higher than they would be for a similar property with a traditional lead, and the buyer may make a down payment of several thousand dollars. They may agree to lease the property for a set number of years or may simply lock in the first right of refusal for when the owner finally decides to sell the property in the future.

There are both benefits and drawbacks to seller financing arrangements. They can benefit sellers, but they create certain risks for property owners, just like they involve some risk for the potential buyers considering these alternative forms of financing. Learning more about how to fund residential real estate transactions can help you choose the best option given the market and your current circumstances.