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When is Seller Financing Right for Buyers and Sellers?
You have probably seen properties listed for sale with seller financing available. This is also commonly referred to as owner financing or owner will carry. If you're already familiar with the terms, this post will explain how seller financing is used to benefit the buyer and the seller in certain situations.
Seller Financing for the Seller
Now let's look at Julie as another example. Julie owns a property in rural Alaska. The property sits on several acres and clearly has structural value. However, the property lacks proper electricity and is therefore ineligible for bank financing. Unless Julie is able to find a buyer that will pay cash for the property, she needs to find an alternative solution to sell the property.
Julie considers all options and chooses to list the property with seller financing available. She quickly finds a buyer that is interested. After reviewing the buyer's qualifications and agreeing to move forward with seller financing, Julie and the buyer negotiate the size of the down payment, the interest rate, and the loan term.
A Promissory Note (note) is formed between Julie and buyer. The note outlines the repayment terms and sets forth contractual obligations for all parties. Essentially, Julie has acted as the bank to finance the sale. Julie now receives monthly mortgage payments from the buyer. She will remain the lien holder on the recorded deed until the note is either paid off or sold.
Many sellers have found that offering seller financing as an option is a great way to attract more buyers. In Julie's case, she was able to sell a property that otherwise would have sat vacant.
Seller Financing for the Seller
Now let's look at Julie as another example. Julie owns a property in rural Alaska. The property sits on several acres and clearly has structural value. However, the property lacks proper electricity and is therefore ineligible for bank financing. Unless Julie is able to find a buyer that will pay cash for the property, she needs to find an alternative solution to sell the property.
Julie considers all options and chooses to list the property with seller financing available. She quickly finds a buyer that is interested. After reviewing the buyer's qualifications and agreeing to move forward with seller financing, Julie and the buyer negotiate the size of the down payment, the interest rate, and the loan term.
A Promissory Note (note) is formed between Julie and buyer. The note outlines the repayment terms and sets forth contractual obligations for all parties. Essentially, Julie has acted as the bank to finance the sale. Julie now receives monthly mortgage payments from the buyer. She will remain the lien holder on the recorded deed until the note is either paid off or sold.
Many sellers have found that offering seller financing as an option is a great way to attract more buyers. In Julie's case, she was able to sell a property that otherwise would have sat vacant.
The Benefits of Seller Financing
When it comes to seller financing, you want to find a solution that is beneficial to you and the buyer. The person buying your property will ultimately determine the success of your seller financed transaction, but negotiating terms of the sale will help you in the long run.
Lets look at some advantages for both seller and buyer.
Advantages for the seller:
- Could result in a quick sale and closing
- Opens your property up to more potential buyers
- The closing process is very simple
- Your monthly cash flow will increase
- You can sell your future payments for a lump sum of cash at any time
Advantages for the buyer:
- Can purchase a property after getting turned down by the bank
- May be able to negotiate the terms of the loan
- Faster and easier closing process
- Lower closing cost
Overall, the decision on interest rate, repayment schedule, and the consequences of default are made between the buyer and seller to find terms that work for both parties.
Although there are many benefits to seller financing, there are some risks as well.
The most common fear with seller financing is if the buyer stops making payments and it leads to a foreclosure. If you don't want to hold the note anymore, you can sell it to a mortgage broker at a discount. The note buyer will take over the remaining payments for you while you get cash up front.
Heres a few more tips for sellers to lower their risk:
Get a decent down payment. The more a buyer puts down, the lower chance that they will stop making payments in the future.
Review the buyers credit-worthiness to ensure they are consistent in meeting their financial obligations.
Set the due date and require fees for late payments.
Require the buyer to carry hazard insurance.
Make sure theres a third party servicer that can accurately track the payments, interest, and balance.
If possible, seek the help of a real estate attorney when structuring your seller financed transaction and creating your note. They can ensure the transaction is seamless and can help maximize the value of your note.
