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Real Answers

October 16, 1994

Q: I'm so desperate trying to sell my house I'm thinking about seller financing. How does that work?

A: Buyers who don't have 20% to put down on a home often are attracted by seller financing. This type of financing involves a second loan from the seller to the buyer at terms and an interest rate that both sides agree to.

These special circumstances must be acceptable to the lender who makes the first mortgage on the property. The necessary paperwork is prepared by the title or escrow company, according to George Devine, in "For Sale By Owner," Second California Edition, Nolo Press, Berkeley, 1993.

Experts advise sellers to thoroughly evaluate the credit-worthiness of the buyer first. Indeed, fear of default makes many sellers reluctant to take back a second.

"You may want to get all your cash out of the house, particularly if you are buying another home," Devine writes. "This 'I won't take a second' position can change, however, if you find it difficult to sell your house at a decent price otherwise."

Besides bringing a better price, seller financing offers these advantages, according to William H. Pivar, "Real Estate Investing from A to Z," Probus Publishing Co., 1993: --Taking payments allows the seller to avoid making a large outlay for capital gains taxes all at once.

--Interest rates on seller carry-back financing are usually significantly higher than the owner can get from investing the sales proceeds in a certificate of deposit, government bonds or a money market account.

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