Should I Offer Seller Financing?

This question just in from a land owner in Uvita.

I have a question about owner financing of real estate property for sale, and do not really know anyone else, besides you, to trust with a realistic, objective and intelligent answer.

We just received an email from the real estate agent who brought the buyer today, asking us what our financing terms would be. As of this moment, I do not know any details about the offer price, what the buyer’s financial position is, how much they have in cash as a down-payment, but before putting our cards on the table, I wanted to ask you about usual and customary seller financing terms in Costa Rica.

What would be typical and reasonable financing terms?

• Is asking a 50% down payment, with a 7-8% interest rate, maybe a balloon payment or 2, in a year or 2, reasonable?
• How can we make the deal air-tight as far as security of the down payment, and if buyer does not meet balloon payments, we get the property back, with no hassle.
• Is there some sort of legal process, escrow or trust vehicle here in Costa Rica to protect us, the seller, from default?

Quick answer (based on info provided):

• 50% down
• interest of between 8% – 12%
• quarterly or bi-annual interest-only payments
• balloon payment on principal and interest payment due at 1 year of half of the balance
• another year with these terms on the remaining balance
• final balloon with final interest payment at the end.
• penalty for late payments.

My position on seller financing – DO IT!

I have personally done seller financing and am, so far, pleased with the arrangement. As a real estate agent, I wonder at why Seller Financing is not more common than it is. It will definitely help with making your property more sell-able. It puts the purchase of your property more in-reach in the cash-starved world we live in.

My quick answer is not intended to be a statement of what is “usual and customary”, because there is no such thing.  Seller Financing is a creative process and varies tremendously from one deal to the next. You consider your needs and match them up to the buyer’s and see if there is a fit.

Some factors  to consider:

• seller’s need or want to sell
• if seller prefers a full price sale
• if there have been few showings of the property and so the need to make this deal happen
• if the market is hot
• if seller lives in Costa Rica
• how much seller needs for a down payment
• how quickly seller needs the balance paid – term of the deal
• buyer’s situation. What are the conditions in their lives that will enable them to meet the payment obligations of the mortgage?
• what will the use-of-property be during the term of the deal
• and so on, there are lots of variable depending on the player’s situations.

How can we make the deal air-tight as far as security of the down payment?

You get the down payment at closing and it is yours to save, spend and/or re-invest how you see fit. I suppose that a possible downside concern to this would be if your real estate agent didn’t effectively do a full disclosure presentation on the property and so some rock-below-the-surface, surfaced after the closing that necessitates the refund of the deposit, but this is a bit of a stretch. Read your purchase and sale agreement and make sure it says that when the due diligence period is over (frequently a 3 week period) buyer accepts the deal as is, no exceptions.

What if buyer does not meet balloon payments, do we get the property back, with no hassle?

Hah! No hassle? Hmmmmm. The lowest hassle type of sale is the full-priced purchase. Your exposure to hassle is more with Seller Financing, but certainly not prohibitive. The idea is that at 12:01 AM on the day past the due date, the borrower is in default, and you have the right to take your property back.

I think that the penalty for late payments clause is a good one, but only necessary if you are willing to allow late payment. Frankly, late payments are common. Most sellers want the deal to proceed and don’t want to take the property back. I like the penalty clause because this helps keep your deal as a priority to the buyer. Without the clause, and they discern that they can be late, they will be. If not, you make some money and the deal will likely continue on to completion.

How much of a “hassle” this is depends on your next question:

Is there some sort of legal process, escrow or trust vehicle here in Costa Rica to protect us, the seller, from default?

This is an important decision: to use a mortgage or a trust. I have always used a mortgage with my clients. I used one in the sale of my own property. However, I won’t say that I am clearly for one over the other. In fact, I have a growing interest in trusts lately (lengthy discussion could ensue.)

This is a key decision in a seller financed deal in Costa Rica and one that requires that you get informed about the differences.

A basic difference is that the mortgage process involves an auction in the case of a default. A trust doesn’t. (There are many differences, so talk to people who have done one or the other and also to your trusted lawyer and make an informed choice.)

I have seen multiple loan deals where there was a mortgage involved, and upon default, the borrower fully understood that he was in default, and so when the lender asked for him to simply sign the property over, he did.

I have also seen deals where the borrower wanted the whole auction process to happen so that he could have more time to possibly get caught up and keep the property.

My overall feeling is that you structure the deal such that, if there is a default, you welcome it. You have your property back to sell again, and you have some extra money in your account from the defaulted sale.

Disclaimer: I am not an authority on Costa Rica Law, other than I have seen that it is frequently irrational. So my positive comment about seller financing has a large caveat – pay attention to the construct of the deal, talk with numerous people and get their views, talk with me – and cover yourself with the amount of the down payment.