Seller financing has become an increasingly popular way for property owners to convert real estate into an income stream. It’s especially useful when potential buyers may have trouble meeting traditional qualifications. A seller financing agreement is handled like a loan for some of or the entire purchase price but instead of lending the money, the financer manages a promissory note for the amount of the loan. This makes seller financing an excellent option in a stagnant local market or in cases where the seller would prefer to treat the property as an ongoing investment without becoming a landlord. The seller may also benefit from a number of tax incentives. A seller-held note does entail fairly strict responsibilities, however. Mortgage note buyer DMO Direct Funding notes four particular characteristics that are universal to successful seller financing.

Competitive Interest Rates: As the seller, the interest rate is completely up to you, subject to applicable laws. Charging too high a rate makes it difficult to get interested buyers, but charging too low a rate provides little or no benefit for the seller. Since you’re not an institution you can charge a lower rate than a bank without taking a hit on your returns, but those returns should still be comparable to other investments. A financial advisor can point you to key indicators like T-Bills that will help you set your rate.

Prudence: Successful seller financing is as transparent and safe as possible. That means that as the seller, you’ve run a full credit check and you have accurate records relating to the property, including recent improvements and any past property inspections. You should also welcome the buyer’s investigations into the property. When these precede the signing you prevent future arguments about the property. Finally, make sure that the property is fully insured. Skipping these steps is the source of a great deal of grief for many would be seller-financers.

Legal Representation: You should never enter into seller financing without consulting a lawyer who specializes in real estate. You are responsible for the integrity of the financing documents and don’t want to be surprised if a malformed clause cuts you off from payments or worse yet, unintentionally runs afoul of the law. A lawyer should also be in easy reach in case there is any future dispute over the note.

Long Term Perspective: You should be able to track how the seller-held note fits into your overall finances over its entire term. That means you need to consider what might happen in an emergency when for one reason or other, payments aren’t coming in. Do you have the will and advice on hand to initiate foreclosure? Do you anticipate significant medical or tuition expenses in your future? Be prepared. Fortunately, if you’ve managed your note reasonably well you can sell it to a mortgage note broker. The note’s seasoning and terms will greatly influence its value.