Dear Monty: I have a builder who wants to buy my house using the seller financing method. I know nothing about this and want to avoid getting ripped off.

The builder wants to use a seller financing method because it’s costly to get permits in my city and it will take several months to get permits. He is also concerned about the high interest rates.

How does seller financing work? If the builder pays monthly and stops paying, what are the repercussions for the owner?

Monty: Here is some background about the arrangement you describe in your question. The document is called a land contract.

It works by reaching an agreement with the buyer (the builder in your question) to pay for the property over time with monthly payments. When the buyer has paid for the property, you provide the deed to the builder.

You can check with the statutes in your state for more information on the legal regulations by doing an internet search for “your state, statutes, land contract.”

You should also seek legal advice from an attorney.

Best Practices

Most property owners should require a down payment of 5% to 20% and require market-rate interest on the loan amount.

Depending on your motivation to make this sale, you could reduce the interest rate or seek a premium rate higher than current rates if you see considerable risk in the arrangement.

There are a variety of ways to structure interest and principal payments. A typical method is a 20- to 30-year amortization (interest and principal payments) schedule with a negotiated balloon payment for the entire unpaid balance in a certain number of years.

Five to eight years may be typical, but the balloon payment could be sooner or further out than this example.

Additional Questions

The builder’s concerns over high interest rates are not your concern. It may be that he cannot find a bank that will give him the deal it sounds like he would seek from you.

It could also be that he is not strong enough financially to get a bank loan, or he has had a bank loan and ruined his credit.

Costly and slow building permits are not a reason for him to get a deal. I suspect you will want to make any deal subject to him furnishing you with proof that he has received the permits.

Hopefully, all will go well, but let’s imagine he fixes up the house and rents it out, but the tenant is bad and beats it up in a year or two.

The builder defaults on the land contract, and you get the beat-up house back — then discover he did not obtain the required permits.

The home may be challenging to sell or will sell for a marginal price without certified copies of all the required permits.

Does the builder have rental property experience? Is the builder going to flip it? Your attorney can advise you on these and other subjects, like lien waivers.

Finally, do you know what your home is worth? You give the builder an exclusive by not testing the market to see if others will pay more.

Many websites today will provide a free range of value with your address.