WHAT IS SELLER FINANCING?

A seller may choose to act as a lender to finance a real estate transaction. This may involve taking back a second note, or even financing the entire purchase if the Seller owns the home free and clear. Sellers would usually do this when a buyer has difficulty qualifying for a conventional loan, meeting the purchase price. It could also be because Buyer prefers to bypass the banks altogether. Seller financing differs from a traditional loan because Seller does not give Buyer cash to close the purchase as would a lender. Seller essentially extends a credit against the purchase price of the home while the Buyer executes a promissory note and trust deed in Seller's favor. If the property still has a current outstanding mortgage balance, these special circumstances must be acceptable to the lender with the first mortgage position on the property. Title or escrow company would prepare necessary paperwork after the terms are worked out between the Buyer and Seller.

As a Seller considering such scenario you should thoroughly evaluate the creditworthiness of the Buyer first. Ideally, Buyer would be pre-approved by a lender and present a pre-approval letter with their offer. If they don’t qualify for a loan from a lender, you may want to understand the reasoning behind it. Fear of default makes many Sellers reluctant to take back a second note, however on the upside Seller financing can bring a higher sale price and expedite the sale.

See the Internal Revenue Service website for a copy of its Publication 537, "Installment Sales."

Who Sets The Rates For Seller Financing?

The interest rate on an owner-carried loan is negotiable. You or your Realtor can check with a lender / mortgage broker to determine the current rates on institutional first or second loans. Seller financing typically costs less than conventional financing because Sellers don't charge typical loan fees. Interest rates on an owner-carried loan will also be influenced by current Treasury bill and certificate of deposit (CD) rates. Sellers usually aren't willing to carry a loan for a lower return than they would earn if their money was invested elsewhere, so you may want to also consult your financial advisor if you’re working with one.

What Are The Benefits Of Seller Financing?

Seller financing offers tax breaks for Sellers and alternative financing for Buyers who can't qualify for conventional loans or prefer not to deal with a bank. If you are a Seller, the risks you face are the same as those facing any lender:

• Is the borrower a good credit risk?

• Will the property hold enough value over time to allow for the repayment of all loans made against it?

You should run a full credit check on the borrower, require hazard insurance on the property, and include a due-on-sale clause. There also are financing, disclosure, and repayment-term requirements that need to be met.

I recommend you consult and work closely with a trusted real estate attorney (let me know if you need a recommendation) with experience of dealing with creative financing, including seller financing, when putting together this kind of transaction. You may also want to work with an experienced transaction coordinator (TC) well-versed in creative transaction (let me know if you need a recommendation).

Read more: https://www.biggerpockets.com/blog/creative-financing

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