What is Seller Financing?

Seller financing, also known as owner financing, is an arrangement where the seller provides financing directly to the buyer, bypassing the need for a traditional lender like a bank. The buyer pays the seller over an agreed period, much like a mortgage, until the property is fully paid off.

Why Do Sellers Choose Seller Financing?

Sellers opt for seller financing for several reasons:

• Attract More Buyers: It expands the pool of potential buyers, especially those with difficulty securing traditional funding or investors looking to expand their portfolio.

• Faster Sale: Flexible terms often result in a quicker sale, particularly in challenging markets.

• Higher Returns: Sellers can charge higher interest rates than banks, increasing profits.

• Tax Advantages: Sellers may benefit by spreading capital gains tax over the loan period rather than paying it all upfront.

• Ongoing Income: Instead of receiving a lump sum at closing, sellers enjoy steady monthly payments, creating a reliable income stream secured by the property.

Common Terms in Seller Financing

• Down Payment: Like a traditional mortgage, the buyer provides a negotiable down payment upfront. A larger down payment offers more security to the seller.

• Interest Rate: The seller sets the interest rate, typically higher than what banks offer, to offset the risks of financing the buyer directly.

• Loan Term: Seller financing generally lasts 5 to 10 years but can be customized. A balloon payment is often due at the end, or the buyer may refinance with a traditional lender before the term ends.

• Amortization Schedule: Payments may be fully amortized over the term, or the agreement might include a balloon payment, where the remaining balance is paid in a lump sum at the end.

• Promissory Note and Mortgage/Deed of Trust: The buyer signs a promissory note agreeing to repay the loan, and the seller holds a security interest in the property through a mortgage or deed of trust, protecting them if the buyer defaults.

Seller financing offers flexibility, allowing sellers to benefit from faster sales, higher returns, and steady income while allowing buyers to finance both primary homes and investment properties more efficiently. It is highly recommended that both sellers and buyers work with a real estate attorney to ensure the transaction is legally sound and properly structured.