Advantages and disadvantages of seller financing

The recent troubles with financing have led many of us brokers to asking sellers: "Will you give a 2nd mortgage to make the deal happen?" The question needs to be asked early in the deal making process. With the current state of the market this issue will undoubtedly come up. It is favorable to clarify early on rather than wait until everyone is sitting around the contract table. Banks are still lending. However, the loan to value ratio has decreased. Most buyers are unable or unwilling to invest more then 30 to 35% equity in a deal. Many banks will currently only supply 50 to 60% loan to value. As a result, sellers may be willing to provide the additional financing needed to get the deal done. Seller financing has its advantages and disadvantages to the seller. The first and most import advantage is the deal gets closed. Furthermore, the seller has direct knowledge of the asset they are lending against, has control over the terms of the financing, and can secure a decent rate on their money for a second mortgage. The clearest disadvantage to the seller is the risk of default. Providing financing to the buyer also ties up equity that may be necessary to fulfill the seller's 1031 exchange. Lastly, some banks do not allow secondary financing against a first mortgage. Although many deals are still happening with conventional financing brokers should always explore the option of seller financing. Bart Zimmermann is the president of Barcel Group, New York, N.Y.