Seller Financing

Seller financing can be a very useful tool in bringing buyers and sellers together to close a deal. It can, in fact, be extremely beneficial to both parties given the proper circumstances. Not only used by the late-night info-commercial creating-wealth-with-no-money-down genre, seller financing is also a very viable mainstream option to help sell real estate.

As a second mortgage, seller financing has typically been used to bridge the dollar gap for a home buyer between the amount of the fist mortgage and the down payment that he or she has available. It has also been used as wraparound financing (new financing that wraps around existing financing). But seller financing can also be used in the first lien position. This is more common of large parcels of bare land that conventional lenders have traditionally not financed.

So, what are the benefits of seller financing? Some of the major advantages include a substantial savings in closing costs for both buyer and seller. The parties can also negotiate the interest rate and the repayment schedule, as well as other conditions of the loan. The buyer can request special conditions of the purchase, such as the inclusion of household appliances or even vehicles. Also, the borrower does not have to qualify with a loan underwriter. And, unless negotiated, there are no PMI insurance premiums.

On the seller’s side, he or she could receive a higher yield on their investment by receiving their equity with interest. The seller could also possibly negotiate a higher interest rate than could be received on other types of investments. A higher selling price could also be obtained as compensation for assisting the buyer with financing. The property could be sold “as is”, thus eliminating the need for costly repairs that conventional lenders would require. The seller could screen the buyer for creditworthiness and the ability to pay, and could also require the buyer to purchase a PMI policy to protect the seller against default. The seller could also choose which security document (mortgage, deed of trust, land sales document, etc.) to best secure his or her interest until the loan is paid.

Are there any disadvantages? Of course there are. For one, the buyer could pay the loan in full but still not receive title due to other encumbrances not divulged by or unknown to the seller. The buyer could make payments faithfully, but the seller might not make payments on any senior financing that may be in place, thus subjecting the property to foreclosure. Also, the buyer may not have the protection of a home inspection, mortgage insurance, or an appraisal to ensure that he or she is not paying too much for the property. (Of course, all of these options can be negotiated into the transaction.)

Sellers, on the other hand, may not get the buyer’s full credit or employment picture, which could make foreclosure more likely. And depending upon the security instrument that was used, foreclosure could take up to a year. The seller could also agree to a small down payment from the buyer to assist in the sale, only to have the buyer abandon the property because of the minimal investment that was at stake.

In short, a seller-financed sale can be good, as long as it is good for both parties. The concerns of buyer and seller must be addressed during negotiations. But with a “meeting of the minds”, it can certainly be a win-win situation for all concerned.