This post first appeared in the June edition of: Cirios Trends: Finding Real Estate Opportunities.

As the aftershocks of the housing crash continue to rumble through the mortgage market, many home sellers, from investors to individuals, would be wise to look into the benefits of offering seller financing to sell their properties. Seller what?

Seller financing is precisely what the name implies: The seller of a property offers prospective buyers not just the house, but financing too. Rather than taking out a traditional mortgage, the seller would issue a note obligating the buyer to repay a certain amount at a certain interest rate, just like a regular mortgage. Terms, including down payment, interest rate and repayment period, are negotiated directly between buyer and seller.

This is by no means a simple transaction and should be entered into only with the guidance of an expert, but seller financing carries potential benefits for both buyers and sellers.

While some real estate markets are in full recovery mode, certain market segments remain slow and illiquid. There are many reasons a home will not sell, but one of the primary factors is a lack of qualified buyers. In today’s market, a qualified buyer is defined as someone who can afford to make the monthly loan payments, can post a 20% down payment and has a high credit score.

Buyers not meeting these criteria are essentially locked out of the market, since private lenders are still charging outrageously high rates and fees.

A logical alternative for home buyers and sellers held hostage by the current lending market is for the two parties to negotiate directly and agree upon terms that work for both parties. Sellers can open the marketing of their property to a wider buying pool, potentially increasing the purchase price. Buyers with dinged credit or who otherwise don’t fit inside the ever-narrow mortgage guidelines can still participate in the housing market by buying a house with seller financing.

For the seller, rather than rolling sale proceeds into the stock market or a low-yielding CD, he or she can create a financial instrument with a consistent rate of return commensurate with secure corporate bonds. And even though the value of the underlying security (the property) could fluctuate and even go down, how good do you feel about the balance sheets of the companies whose stock you own? There are risks in issuing a mortgage to someone to buy your house, but the risks are tangible and often easier to wrap your head around than the volatile stock market.

Seller financing actually happens all the time when big banks and investment companies buy or sell assets. For example, when it was still an independent company trying to raise cash against the backdrop of a collapsing financial system, Merrill Lynch infamously sold various collateralized debt obligation investments for 17% of their face value. The move shocked markets, as all of a sudden the rest of Wall Street had to reprice their assets to this new, dramatically lower level.

Behind the scenes, however, the trade indicated that market conditions were far more dire than they seemed. Merrill offered cheap leverage to the buyer of the assets, enabling the buyer to put up almost no down payment yet still make the purchase.

Merrill, desperate to shore up it’s balance sheet, could book the sale and remove the assets from its books. In their place was a shiny new loan. However, since it would be forced to take back the assets if the buyer (now borrower) defaulted, Merrill really hadn’t unloaded any of its risk.

The lesson here is that seller financing should only be undertaken by parties familiar with the risks and potential benefits of this sort of transaction. This knowledge can be learned though, so even if you didn’t understand a thing you just read, don’t be disheartened.

A good real estate or financial professional should be able to walk any buyer or seller through the logistics of seller financing. Sellers should know that they do retain the risk their property may depreciate, but can also earn a solid rate of return with the possibility of selling their home at a higher price.

Buyers have another option if they get turned down by the bank, even though it is likely to be a more expensive one.