In a market where houses are selling slowly, homeowners willing to finance the purchase for a buyer have an advantage.
Homeowners who have accumulated a huge amount of equity in their houses often can afford to hold a second mortgage - or perhaps the whole mortgage.Those with FHA- or VA-backed mortgages can allow buyers to assume the mortgage - with or without requiring the buyers to qualify with a lender.
Holding a mortgage on a house can be a good investment. You can charge an interest rate of at least 12 percent. Since the house is used as collateral, many investors consider second mortgages safe and lucrative.
But homeowners without experience in second mortgages would be wise to consult a lawyer before agreeing to hold financing for a buyer. In slow markets, when real estate agents aren't earning much income, some agents will go to dangerous lengths to get a commission.
One agent had a buyer with sufficient income to pay a mortgage but no money for a down payment. The agent found a seller with an assumable FHA-insured mortgage who also was willing to hold a second mortgage on the house. But the seller wanted the buyer to make a down payment large enough to pay the 6 percent real estate commission on the sale.
This agent had an idea. He suggested that the seller - besides holding a second mortgage on the house - take out a loan to get cash for the real estate commission. He promised that the buyer would make payments on the first mortgage, the second mortgage - and the loan the seller had taken out to pay the commission.
In other words, the buyer would be putting no cash into the deal, and the seller would simply have to trust him to make three payments each month - one on the first mortgage, one on the second and one to pay off the seller's loan! The seller would be taking all the risk. The agent would walk away with his commission. If the buyer couldn't handle the payments later, that wouldn't be the agent's concern. That was the most outrageous proposal the seller received. But several other agents suggested a third mortgage on the house. Under this scheme, the buyer would assume the first mortgage and the seller would hold a second and third mortgage. The third mortgage would be used to cover the real estate commission.
Some sellers are willing to accept such risky arrangements to sell their house. They figure that if the buyer defaults on these multiple mortgage payments, they can go to court and get the house back.
But in most states, getting a homeowner out of a house is an expensive and time-consuming process. And even if the seller gets the house back, he would have all the expense of selling it again.
The risks of multiple mortgages are also severe for buyers. Most second and third mortgages are short term and require a balloon payment, sometimes as early as five years after the deal is struck.
When the money comes due, unless the homeowner has enough cash to pay off the mortgage, he will have to refinance or sell the house. Some homeowners in markets where housing prices are stagnant or falling are finding that they can do neither.
These homeowners put little or no money down on their homes in the first place and the houses have not risen in value. Consequently, they don't have enough equity in the house to qualify for a bank mortgage. And they can't sell the house for enough money to pay off all their mortgages.
Sellers and buyers can both profit through seller-financing. It is often a good vehicle for first-time homebuyers with little cash, and it can move a house in a slow market.
But both buyers and sellers should look at such deals carefully and consider what can happen down the line. Remember, the real estate agent won't be around after the commission is paid.