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# Lending a hand to prospective buyers
- URL: https://www.smdp.com/lending-a-hand-to-prospective-buyers/
- Published: 2007-05-16T15:00:00.000Z
- Updated: 2026-10-25T00:03:41.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By Mike Heayn Real Estate 101*

IN TODAY’S SOUTHERN CALIFORNIA real estate market homes are still selling for a premium, but some houses remain on the market longer than homeowners would like. As a real estate market begins to cool, sellers tend to offer buyers incentives to purchase their home — one such incentive is owner financing. If a buyer has a gap between his lender financing and down payment, you as the seller could offer seller financing.

The most important thing to remember if you are a seller offering financing — or “carrying back”a promissory note — is to mimic lenders such as banks. Banks have been lending money to homeowners for decades and have an effective system. When carrying back paper for a buyer think of your local lender and all of the language and terms they expected of you. Replicating certain language will help prevent a buyer, from walking away from his obligation.

Like any good lender, the first thing you should do before offering a buyer financing is to request a personal financial statement. You want to know if the buyer has the qualifications to pay you back. As a seller, you will probably not use debt to income ratios, but will want to make sure the buyer is employed and earns enough income to carry both the lender’s loan and your loan, along with his/her other financial obligations. In addition to requesting a personal financial statement, pull the buyers credit from all three bureaus. You want to make sure the buyer does not have any tax liens or bankruptcies on his credit. If you come across these items, ask the buyer what happened and ask for paperwork to verify what the buyer has told you. It is possible, although unlikely, that the buyer has a reasonable explanation for delinquencies and derogatory items. As a seller, you will have to make the final judgment call on whether or not you will provide financing to the new buyer.

If you have decided to extend financing to the buyer, make sure you write up a contract for the buyer to sign. You are actually extending a loan to the buyer and need to make sure you have the proper language in the contract. If you are concerned about writing a real estate contract, consult an attorney. It is better to spend a little money now getting it right instead of a lot of money later because you got it wrong.

Every real estate contract should have a maturity date and payment due date. Although this seems obvious, you would be surprised at how many people forget this rule. Like a lender, make the due date on either the first or 15th of every month and allow a grace period if you so choose. Clearly state what the penalty is for a late payment, and how it needs to be paid (i.e. will it be added to the loan amount or does it need to be paid with the next payment). Also, make sure you specifically state the interest rate, amortization period and maturity date. If you are not sure about these items, consult an accountant as well as an attorney. It is also important that you collect an earnest money deposit from the buyer to cover you in case they do not follow the language in the contract.

Another item you want the buyer to be aware of is homeowner’s insurance. Make sure they have it continually. If the policy lapses, impose a penalty such as keeping the earnest money deposit. Also, make sure that the buyer pays his property taxes on time. Usually a lender will have taxes and insurance impounded with the payment, but you want to have a hook in the buyer as well. This is another reason for the earnest money deposit.

Two other items that need to be addressed are a due on sale clause and a prepayment penalty. A due on sale clause states that you, the seller, will be paid in full if the buyer sells the property. If you want, you can have language that allows a new buyer to be approved by you and thus assume the existing seller financing. If you are providing seller financing you probably will not want to be paid a large sum of money out of the blue, instead do what a bank does. One solution is to attach a prepayment penalty if the loan is paid off early. A prepayment penalty will discourage a buyer from paying off financing early, which in turn can keep you from getting hit with a large unexpected capital gain.

The tips above are for informational purposes only. Please consult an attorney before drafting a real estate contract. If done correctly owner financing can help sell a house faster than normal and even earn you some passive income in the process.

MIKE HEAYN is a Washington Mutual Multi- Family Loan Consultant. He (310) 428-1342, or e-mailed at

*Originally published in the Santa Monica Daily Press print edition on May 16, 2007.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/051607.pdf?ref=smdp.com)