Seller Financing – Making it Work for Both Sides

Thought the market is quite buoyant at the moment, given the amount of houses on the market, it’s not surprising that many house sellers are more open to flexible payment terms than before.

We all know how difficult it is for us unsavoury foreigners to successfully obtain bank financing/mortgages from Thai banks. I’ve had a few customers over the years who have managed to secure financing for 50% of the bank’s estimated value of the property (usually around 85% of the actual selling price). But, speaking from personal experience, it’s not an easy process to go through.

In the past, if you haven’t been in a position to pay the full agreed selling price, your best option was to buy something (house or condo) off-plan and at least be able to make stage payments throughout the build period (typically 6 – 9 months for houses and between 12 and 48 months for condos). But what if you want to buy something that’s already built and ready to move into? This is where seller financing comes into play, and it’s becoming more common today than ever before. It is a very easy, safe, legal and affordable solution to many buyers and sellers. It can be fully registered at the land office and is even indicated on the back of the title deed (chenoud), much like a registered lease.

Seller financing really can work well for both the buyer and the seller. From the seller’s point of view, the benefits are really three-fold: (1) Your property is appealing to a broader customer base, (2) With the interest collected, your return is much better than having your money sit in the bank, and (3) If the buyer defaults on the agreement during the course of the finance period, the property is yours again with all monies collected in pocket.

From the buyer’s perspective, there are four major benefits: (1) The current market interest rates are the lowest in 10 years, (2) You can avoid tying up all of your invest-able cash into one asset, which allows you to diversify into other investments that offer good returns, (3) Financing gives the buyer time to sell off other assets to possibly pay back the mortgage faster, and (4) A flexible pay back schedule can be negotiated so that the buyer does not over-extend themselves.

So how does it really work – Let’s start from the beginning.

We have a seller who wants to sell their property with the option of financing. Most sellers we have been dealing with are interested in financing an average of 50% of the total cost of the property. So let’s say the property is 6 million Baht. We manage to secure a buyer for the property who can put down 3 million Baht up-front and wants to have the last 3 million Baht financed by the seller for five years. The seller is asking an interest rate of 6% per annum.

There are a couple of options as far as how the money is paid back. Some owners aren’t too fussed if they get back any of the 3 million Baht principal during the five year period – only have the interest paid to them during the finance period with the 3 million principal sum paid in full at the end of this period. Meaning they would make payments of 180,000 Baht per year as interest with 3 million Baht paid at the end of the five-year term.

The most popular option works the same way a fixed bank mortgage would work – as in the payments are amortized over the five year period (First year – 3 million x 1.06) x (Second year – 3.18 million x 1.06)…etc., etc…Whereas the total sum of five years of amortized interest and the principal are divided into 60 monthly payments.

There are several variations on the payback setup. In some cases, the buyer may want to settle the entire amount after only a couple of years. Amendments to the mortgage contract can allow provisions for this. A legal mortgage contract can be drafted at several reputable area law offices for a small fee of about 5,000 – 10,000 Baht.

Now it comes time for making it all very legal. Both parties would go to the land office as usual. The regular transfer fees are paid (who pays these fees is up to what is negotiated) and an additional fee of 1% of the amount being financed is also paid. Now, on the chenoud (title deed), the property will now be in the name of the new buyer, but underneath it will show that there is an outstanding mortgage owed to the old owner (seller). If you have ever transferred a property at the land office where the seller has a bank mortgage on the property, it’s essentially the same thing.

Once the mortgage has been paid off, another 1% of the mortgaged amount must be paid to the land office to have the mortgage removed from the chenoud…and that’s that.

Should the buyer default on their mortgage, according to the terms and conditions in their mortgage agreement, the seller simply has to take the mortgage contract to the land department, show that the buyer has defaulted and the buyer’s name is removed from the chenoud, and the property’s ownership is reverted back to the original seller’s name.

I’ve had a couple of sellers who have asked to have their mortgage agreement remain private. The seller doesn’t want to transfer the property whatsoever until the full amount has been paid back to them. In this case, it is easier for the seller to take back their property should the buyer default on their payments. However, from the buyer’s perspective, they don’t have the same sense of security as when you register the mortgage at the land office. Having said this, a solid contract can be drafted and notorized that clearly outlines the terms and conditions of this private agreement.

This article was prepared by Stu Sutton, managing director of Jomtien Property. I welcome any comments, criticisms and particularly adulations, so please feel free to contact me at [email protected] or 086 108 6575, or visit Jomtien Property’s extensive website at www.jomtien-property.com