Hamptons buyers turn to sellers for financing

By Sara Polsky | January 07, 2009 03:45PM

As lending dries up, some hopeful Hamptons buyers are turning to a new source of financing — the homeowner.

Hamptons brokers say they are seeing increased interest in seller financing, also called owner financing, in which the seller acts as a bank and holds the paper on the buyer’s purchase.

“There’s really not a particular type of property. It’s going to be something that you’re going to see across the board,” said Gary DePersia, an East Hampton-based associate broker and senior vice president at the Corcoran Group, adding that it will be “part of the more creative stance sellers are taking.”

Owner financing is a less traditional method that has distinct benefits for the seller, said Adam Miller, a real estate attorney at the Bridgehampton-based Adam Miller Group.

“The seller gets the immediacy of a sale but also has the security of an annuity through the payment of a certain interest rate,” he said. The interest rate can be as high as 7 or 8 percent. And if the purchaser doesn’t pay back the loan, the seller has the power to foreclose. Seller financing may be especially beneficial in the Hamptons, he said, where “many of the sellers don’t necessarily need the bulk that they would get in a traditional sale.”

Mary Slattery, a Southampton-based associate broker at Corcoran, said last month that she had worked on two Hamptons deals involving owner financing after lending tightened in September. The owner of a four-acre property in Water Mill agreed to finance the buyer’s purchase for three years at a rate of 5.5 or 6 percent, Slattery said.

“We could have lost that deal and we didn’t,” she said. Owner financing “really helped the property close.”

She was also working on another listing where the buyer was in the middle of negotiating owner financing. For both properties, the sellers chose to offer that financing option rather than lower their asking prices, Slattery said.

“Both of these property owners have owned these properties for over 25 years, probably over 30 years,” she said. “They’re in a better position to be able to hold some of that paper.”

Sellers may also see tax advantages to doing their own financing, DePersia from Corcoran’s East Hampton office said.

But seller financing has “been discussed more than it’s been implemented” so far, said Miller the attorney, who added that he may soon offer an owner financing seminar for Hamptons brokers.

Charles Manger, vice president in the Brown Harris Stevens’ Southampton office, said he doesn’t yet consider seller financing a trend in the Hamptons, “but I think it could become a trend” over the next several quarters.

But Michael Daly, principal broker at True North Realty Associates, said he has seen a decrease in owner financing in the Hamptons since last fall.

Sellers are still too nervous about the economy to turn en masse to owner financing, Daly said. “I think that current owners…have a healthy level of concern about being stuck with buyers who may default….Unless you’re prepared to take back your property, it’s probably not wise to offer owner financing.”

At the same time, it could be “an excellent way of helping make some deals happen right now, because the mortgage offerings are so strict and it’s common for people to have to put down more and more,” Daly said. If a seller could add 10 or 20 percent to the financing offered through a conventional mortgage — that could save a deal.

Whether owner financing becomes more popular in the Hamptons may depend on the rental market this year, according to Slattery, from Corcoran’s Southampton office. Usually, any owner can opt to rent out a property instead of selling. But “we don’t know how our rental market is going to be yet,” Slattery said. “Let’s hypothetically say our rental market is down, and there’s someone with a property on the market who can do owner financing, we might see more of it.”