- Desperation: Some houses are difficult to sell because of major warts, and some won’t sell because they’re overpriced.
- A high interest rate on your money: You have dollar signs in your eyes. You can earn a higher rate of interest lending money to the buyer of your house than you can investing through bank accounts and most bonds.
By offering seller financing, you broaden the pool of potential buyers for your house. Traditional mortgage lenders are subject to many rules and regulations that force them to deny quite a number of mortgage applications. But, as we discuss in upcoming sections, making loans to borrowers rejected by banks can be risky business.
So you absolutely, positively must thoroughly review a prospective borrower’s creditworthiness before you agree to lend him money as a condition of selling him your house.
In addition to helping sell a house, some sellers are motivated to play banker and lend money to the buyer of their property because the mortgage usually carries an attractive interest rate, at least when compared to the typical returns on conservative investments, such as bank savings accounts (currently 1 to 2 percent) or CDs and Treasury bonds (currently around 2 to 3 percent). If you have money to invest but investing in stocks terrifies you, lending money to the buyer of your house may interest you. You may be able to earn 7+ percent in interest by lending your money to a borrower.Agreeing to offer a mortgage to the buyer of your house can clearly be advantageous; the loan may help sell your house faster and at a higher price and, at the same time, provide a better return on your investment dollars. However, nothing that sounds this good ever comes without some real risks. If you lend your money to someone who falls on difficult financial times or simply chooses to stop making mortgage payments, you can lose money, perhaps even a great deal of money. And you may have to take legal action and foreclose if the buyer defaults on the loan. And if all that isn’t bad enough, you’ll again be the owner of a house that you thought you’d sold, with all the associated expenses of home ownership, including higher loan payments for the buyer’s new first mortgage and, most likely, a higher property tax bill. Foreclosed homes also tend to deteriorate under the care of the prior owners, so you can also expect fix-up costs.