Seller financing: a win-win?

Seller financing sounds complicated but it isn’t. Think of like this: Seller = Bank. In a typical real estate transaction with financing involved, the buyer obtains a loan from a mortgage lender or bank. With seller financing, the buyer gets that loan from the seller instead. Seller financing is sometimes referred to as “owner financing” but since title changes at closing the owner is no longer the owner, so I prefer “seller financing” when discussing the concept.

OK but is seller financing better for buyers or sellers? Often it is better for both.

For a buyer, there are several benefits to seller financing. The top benefit to most buyers is the savings they enjoy on closing costs. Mortgage lenders typically have several different types of buyer charges at closing… origination (points), underwriting, processing, document preparation and attorneys fees, plus appraisal and other third party costs. None of these fees are required with a seller-financed transaction. Next, the process of obtaining seller financing is also often much less intrusive than obtaining a loan from a traditional lender. For example, a credit check may not be necessary and document requirements are usually minimal. Lastly, depending upon how the deal is structured, the buyer may be able to get into a property without the standard down payment… often 20%+ of the purchase price. If the deal makes sense to the seller (which it often does, see below), a buyer may be able to purchase the subject property with very little cash up front.

Not every seller can offer financing (well technically that is not true, but we’ll leave a thorough discussion on subject-to for another day), but for those sellers that can, there are many great benefits to financing a buyer’s purchase. By offering or agreeing to seller financing, sellers are more likely get their asking price (or more). The up-front cost savings that buyers enjoy along with terms they secure means they should be able to offer more for the property. Next, sellers who finance can likely also sell as-is without having to make any repairs to the property. With no institutional lender involved, there are no property condition requirements to meet. Further, sellers who offer financing might also see the tax benefits of avoiding capital gains and instead receiving installment payments. The amount realized over the life of the loan (even on a 5 or 10 year balloon, let along a 30 year carry) can be significantly higher than with a standard sale. Lastly, if the buyer does default, since the seller holds a deed of trust or mortgage on the property and can foreclose if necessary, this reduces the risk of loss considerably. If things go sideways they may either take the property back (after receiving years of payments) or get paid in full at the foreclosure sale. Once a seller discovers all the benefits of this method of sale (buyers may need to do some explaining here), they may feel comfortable enough about the structure of the transaction that it almost doesn’t matter who the buyer is!

So now that you can see that seller financing is clearly a win-win for both buyer and seller, how do the parties prepare a contract for a sale with seller financing?

That’s simple. You simply add in the purchase price/payment section the details of the loan. For example, “Seller agrees to hold a Note secured by first lien Deed of Trust in the amount of $X with an annual interest rate of Y% amortized over Z years, payable in equal monthly installments of [principal and interest/interest only] in the amount of $[], with the final payment of all outstanding principal and interest due, if not sooner made, on or before [maturity date].”