Pitfalls to avoid in providing a mortgage
Q. Is seller financing a good idea? I am trying to sell a group of properties and the realtor suggested I might want to offer financing to help an investor who might not be able to get the funding.
— Ready to sell
A. Seller financing — the seller giving a mortgage to a buyer — can be a great idea, but it can also be full of risk.
For starters, you need to consider the tax ramifications.
“This is an installment sale, so you will not be receiving your gain all at once,” said Stephen Craffen of Stonegate Wealth Management in Oakland. “Therefore, you will be taxed on part of the mortgage payments you receive.”
That means you need to speak to your tax preparer to see what impact that will have on your finances.
You also have to be prepared for the worst — a buyer who doesn’t stick to the mortgage agreement.
Carefully check the buyer’s background, especially the buyer’s credit report, Craffen said.
You will also need to verify they are maintaining the property and that they have adequate insurance until the mortgage is paid in full.
“You will be named as the mortgage holder and will need to see a copy of that policy each year to confirm you are listed on the endorsement,” Craffen said.
Craffen said it is important for you to also know that in the event you do have to foreclose, the process in New Jersey is very involved and it could take two years or longer to complete.
“In the meantime, you would not receive mortgage payments and you may also have to make property tax payments if the buyer has not,” Craffen said. “While you are in the process of foreclosing, the buyer may also have ignored maintenance on the property and you may finally receive a property back that has now deteriorated.”
Plus, do you really want to extend credit to a buyer who can’t qualify for a traditional mortgage?
Craffen said unless you are an expert in this part of the real estate business, he’d recommend against it.
When you do sell, remember to take all the deductions you can to lower your potential tax burden.
Email your questions to Ask@NJMoneyHelp.