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.
Let’s 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.
Here’s 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’ll stop making payments in the future.
- Review the buyer’s 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 there’s 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.
Your Quick Reference for Seller Financing
If you own a property outright, seller financing can be a quick and low cost alternative to conventional bank financing. However, it’s not very common. In fact, seller financing is only used in about 10% of real estate transactions nationwide.
Why wouldn’t this quick and low cost way of selling real estate be more common?
We feel that many property owners are not familiar with seller financing and do not understand the benefits it could offer them. It’ll take more than reading one blog post to get you comfortable with using seller financing for your own real estate, but this is a great start to educating yourself on a niche topic.
Here’s a few points to kick start your knowledge of seller financing:
There is no bank involved. The transaction occurs between the seller (presumably you) and the buyer. Bypassing the bank is a great option if you’re selling a property that wouldn’t qualify for a conventional loan. You don’t have Fannie Mae and Freddie Mac lending requirements holding you back.
The seller has more options. You negotiate directly with the buyer to set terms for the down payment, interest rate, monthly payment, and amortization. You can choose terms that work best for your situation. Perhaps a 30 year loan does not appeal to you. You can shorten the amortization by requiring larger monthly payments or scheduling a balloon due date.
There are some drawbacks. Seller financing isn’t perfect and there can be situations where it should be avoided. We strongly recommend not using seller financing if the property is not owned free and clear. Doing a wraparound mortgage with a bank loan can be risky. Another risk that you may face is foreclosure. If your payor stops making payments, the note goes into default and foreclosure proceedings begin.
The seller can cash out. Holding a note can be a great investment, but there are several reasons why you might consider cashing out. Maybe a new opportunity came up or you have excess bills that need to be paid. Whatever the reason, you have a source of monthly cashflow that can be exchanged for a lump sum of cash today. After the note is sold, the buyer continues to make the payments according to the original terms of the note.
If you are interested in selling a property using seller financing, we recommend getting the help of a real estate attorney. They can determine if seller financing is right for you and help properly set up the terms of the note.