Owner Financing Primer
Seller financing can sometimes provide a way for parents or grandparents to help their children or grandchildren. Such help may spring from an effort to avoid taxes, help a spendthrift relative, or many other reasons. Such goals will complicate the transaction and make problem solving more difficult if there is a problem with the loan. However, it may still be worth considering.
For example, in 1971 we were moving to Albuquerque so I could go to graduate school. My in-laws located a house near campus for sale by owner (FSBO) for $18.900 with $5,000 down an assumable old loan at 5% interest, and the sellers would carry the balance on a New Mexico Real Estate Contract. ( A NM REC is a very good form of seller financing which exists in NM but not elsewhere. I discuss it in detail at RealEstate-Contracts.com). They had recently moved themselves and were not in a position to help. $5,000 was a lot of money in those days and my wife and I didn't have it either.
After much thinking we approached my grandmother for a loan. As it turned out, she had that kind of money sitting in a savings account and was happy to loan it to us so we could buy our first home. We wrote up a simple note, and payed her monthly over a five year period.
I think this is a perfect example of circumstances where family members with different financial needs can help each other without giving up anything themselves. My grandmother needed to earn interest on her money so we paid her what she was getting at the bank. We needed a chunk of cash, but could look forward to increasing income when I finished school so repayment was not difficult. The house was right next to the campus and in good condition. My in-laws had moved frequently, always moving up with their homes, and in their experienced view the house looked like a good investment. It all worked out very well in the end.
Looking back I can see a number of ways where the result might not have been so good.
If my grandmother had suddenly needed her money back, we couldn't have done it. If she had tried to sell the contract to a note broker she would have learned that a contract in third position behind an institutional first and a seller financed second is almost worthless. We would probably had to choose between telling her "Sorry" or selling the house. In any case it would not have been fun.
Her contract was not paid via an escrow account like the first and second. If we had quit making payments on the first and second she would not have been notified when the foreclosure started. In fact, if we had kept paying her we could have lost the house and she would not have known. In a situation where more money was involved this sort of financial "Mishap" could have expensive effects.
It was a very informal loan. If she had died while we were paying her and her heirs were at war with each other over the assets of the estate there would have been some potential the legal action(s) could have splashed our way and created problems with the title. For example, what if we want to sell the house. Who would sign to release the note if several people are litigating it's distribution.
I could go on, but you get the idea. Helping your kids is good. Helping your kids is dangerous. For investments the correct answer is always "It depends."