What is Seller Financing?
Seller Financing is a real estate sales agreement where the buyer and seller handle the mortgage process without using an outside financial institution. Instead of applying for a conventional bank mortgage, the buyer signs a mortgage with the seller. Owner financing is another name for seller financing. It also called a purchase-money mortgage.
HOW SELLER FINANCING WORKS
Sellers are attracted to seller financing arrangements for a variety of reasons. Most commonly, the seller is looking to maximize their potential profit or they are looking to sell an outdated, damaged, or inherited property. In any case, a seller financing arrangement can provide the seller with a higher purchase price over the term of the sale.
Buyers attracted to seller financing are often those finding it difficult to get a conventional loan, perhaps due to poor credit. Unlike a bank mortgage, seller financing typically involves few or no closing costs or and may not require an appraisal. Sellers are often more flexible than a bank in the amount of down payment. Also, the seller financing process is much faster, often closing in as little as a week.
HOW IS THE SELLER PAID?
Sellers are usually paid in three ways: a down payment, a monthly payment, and a balloon payment.
The down payment is paid from the buyer to the seller at the closing. Down payments can range from 1% to 10% and are entirely negotiable between the buyer and seller. A good down payment is typically around 5%.
The monthly payment is paid from the buyer to the seller each and every month over the term of the arrangement. The amount of the payment (known as the “note”) will be determined by the purchase price, the down payment, any interest, and the term of the note. The monthly payment provides steady and reliable income to the seller during the term.
Many seller financing arrangements provide for a balloon payment. Some seller would rather receive a reduced price in order to receive all of their money in a shorter time frame. For example, if the note is amortized (financed) over a 30 year period, the seller may ask for a balloon payment to be paid in 7 or 10 years. This allows the seller to collect payments during that time and then collect the majority of their funds in one lump sum when the balloon payment is paid. The downside of a balloon payment to the seller is that they could potentially miss out on years worth of interest payments.
WHAT IF THE BUYER DOESN’T PAY THE MORTGAGE?
It’s understandable for sellers to ask, “what happens if the buyer doesn’t pay the mortgage”? Not to worry, it’s not as scary as it sounds.
THE PROPERTY IS SECURED
In a seller financing arrangement, the seller is protected with a few a key documents. Depending on your state, these documents will either be called a Deed of Trust or a Security Deed and they both function in the same manner – they protect the seller. These documents are recorded (filed) at the local courthouse and place a lien on the property.
If the buyer stops paying the mortgage, the seller can file for foreclosure and the property is transferred back to the seller. (BONUS: any improvements and upgrades made by the buyer also become the property of the seller.)
AFTER A FORECLOSURE
Once the property is transferred back to the seller, the seller can choose to seller finance it again or list it on the MLS (Multiple Listing Service), usually for a higher price than they originally sold it for because it has either appreciated in value due to market conditions or the buyer made additional improvements/upgrades that increased the value of the home.
In most cases, seller financing arrangements work to the benefit of both parties and everyone ends up happy at the end of the transaction. By structuring the deal correctly, both buyer and seller are protected and everyone fulfills their obligations.
Hopefully, this brief blog has given you some additional insight into how seller financing works. At West Creek Capital, we’re happy to answer any questions you may have and structure a seller financed purchase that creates a win-win for you and for us.
- In a seller financed sale of a home, the buyer purchases directly from the seller and both parties handle the arrangements.
- Often seller financing includes a balloon payment several years after the sale.
- In most cases, seller financing arrangements work to the benefit of both parties and everyone ends up happy at the end of the transaction.
Let 855JENNYBUYS Help YOU Sell That House
If you’re interested in learning more about seller financing and how it can be an effective strategy for you, don’t hesitate to reach out – we’re happy to help.
At 855JENNYBUYS we buy homes in a variety of conditions. Call us today to get your quote, and stop worrying about a house you can’t afford to fix up. Take this first step toward alleviating yourself of that burden and opening the page on a new chapter of your life.
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