While selling or buying a house you will probably have numerous opportunities floating in your mind. Seller financing is one of the most important. Here’s what you need to know.
What is seller financing?
Seller financing is just as it sounds. Yes, you heard it right. The seller finances the buyer rather than a financial institution. The seller holds the mortgage / acts as a lender for the purchaser. The purchaser then makes a down payment and pays the remaining amount in installments usually with interest until the total amount of loan is repaid. The seller doesn’t actually give the cash to buyer but instead extends the credit. This deals are usually short term, compared to loans from a bank or any other financial institution which may take 15 – 25 years to repay. And it is for 5 years traditionally while they can be for shorter or longer time duration. It is also come with less financial or legal hurdles and usually catches the attention of those buyers who are low on cash or credit and are usually unable to utilize traditional lending.
Benefits of Seller Financing:
Benefits for sellers:
· It is Easier and Faster:
It is an easier and a faster method to sell or buy a house compared to taking a loan from a financial institution. Loans from banks include taking weeks for approval and a bunch of legal tasks that may take up to a month and so on. Seller financing deals are usually settled in a shorter period of time i.e. a week to 15 days. It also highly depends on the buyer and the seller.
· Expands the Market:
Seller financing also expands the buyer’s pool. It increases the number of interested buyers which makes the job easier for the seller. It also allows the seller put their terms and conditions forward.
· Seller financing can get you more money:
Seller financing can help the seller earn more as they may ask for a higher price than the actual market price. Not only that, the seller also gets the interest payments.
· Short term deals:
Seller financing deals are usually short term unlike banks. When the seller finances or lends, the loan is usually due within 5-10 years which makes it easier for both parties.
- Deferred taxes
When a seller holds a note for the home, they can stretch out the capital gains tax burdens. Otherwise, they would be responsible for paying taxes on the entire capital gains in one year.
Benefits for buyers:
· Buying Otherwise Unaffordable Houses:
It allows the buyers to buy houses that they cannot buy normally. Banks often dictate whether a buyer can afford a home. Seller financing allows them to not only buy a house, but also decrease their worries of bank restrictions.
· Flexible dealing:
Seller financing deals are more flexible. The amount of the down payment, installments or the interest can be negotiated unlike the bank where the buyer has to accept all the terms and conditions.
· Possibility of buying more property:
Seller financing makes it possible for the buyer to buy more than one property at a time. Imagine that you have to buy a house and an office both at the same time, but you don’t have that much cash or credit. Seller financing allows you to both at the same time.
· Less Logistical Hurdles:
Seller financing frees you from the regular banking tasks, visiting the manager daily, handling the bunch of queries and what not. Instead, it’s a much simpler and easier option. It also saves you from paying high baking fees.
Closing process:
Seller financing closing processes are a bit different than the traditional real estate closing process. In real estate closing, when the buyer completes the payment via bank loans and the seller receives it, the buyer then gets the ownership. In seller financing the buyer signs the promissory note. The promissory note is the buyers promise to make all the payments and if the buyer fails to do so or defaults, the seller can foreclose. The seller is recorded as the lien holder and gives the title or deed to the buyer which allows him to refinance or sell the house.
Reducing risks in seller financing:
- Make sure to have a professional review or create any written document for the agreement/contract outlining all terms and conditions from both parties.
- Complete detailed information about the buyer including their assets, profession, income etc should be given to the seller. A proper written loan application should be required.
- Making a down payment. Sellers should collect some percentage of the purchasing amount from the buyers. Buyers would be more reluctant to walk away as they will have their investment at stake and sellers would have some relief too.
Seller financing is a unique option. I can create wonderful opportunities for more people to buy homes. It is a valid choice which can benefit both the parties if done under right circumstances.
Informative article about seller financing, thank you !!