Seller Financing: An Introduction
Whether you’re buying your first home without much of a credit history or looking to sell your property more quickly and cheaply, seller financing is becoming more and more popular as a means of moving real estate. For one, the middleman is cut out of the deal, and if you’re a real estate investor you know exactly how much realtor commissions can eat into your profits. This also carries benefits for the buyer, who can save on closing costs as well as find a better interest rate through seller financing than what might ordinarily be afforded to them through a bank or other lender.
What is seller financing, exactly? Pretty much what it sounds like, for the most part: the seller or owner of the property also becomes the lending institution or the bank in a sense. Most homeowners didn’t pay for their properties upfront – in fact, homes are such an expensive investment that it’s quite rare for someone to do so – so they usually needed to get a loan in the form of a mortgage, funded by a bank or other formal lending institution. When you buy a home, the usual process is to save up for a down payment, make sure you have good credit, and then apply for a mortgage from a lender, which you’ll then pay off at varying rates per year depending on the price of the property, the interest rate, the size of your down payment, and the structure of the loan. Again, this is all usually done through a traditional lender. With seller financing, these same steps take place, but the seller finances the property through a promissory note – as opposed to the bank paying them a lump sum of money – and the buyer pays off the home according to the arranges terms.
As we mentioned earlier, this carries the advantage of removing certain players and middlemen from the transaction, all of whom can drive up costs or complicate the closing process. The greatest advantage is removing a realtor and their commission from the process, which not only eats into the seller’s profit but also carries closing costs, as does completion of mortgage agreements with banks or traditional lenders. In addition, it expedites the process for both the buyer and seller and, if mutually agreeable terms can be reached with minimal risk for both parties, greatly streamlines the process.
As a seller, the goal is obviously to sell your property for an acceptable price in a timely manner, and offering seller financing works to your advantage because it allows you to work with more potential buyers. The reality is that a lot of buyers may not even consider buying your property simply because they simply haven’t access to the funds they need in order to purchase it. When you offer seller financing, you’re able to work around this and make the deal enticing to them because you’re giving them the financial leverage they need.
Another way seller financing is expedient is because it helps move the property to buyers who might otherwise be on the fence about it. For most, the credit checks, paperwork, and usual red tape are a turn-off. With seller financing, as long as the buyer is okay with the interest rate, the down payment, and monthly payments, there’s really not a whole lot more to do other than sign a promissory note. Not that you, whether you’re a buyer or seller, shouldn’t have a closing attorney involved no matter what, but seller financing is a simpler option in nearly every respect.
If you’re on the other end of this and looking to buy a home, then see what your options are with finding a property where the seller is willing to finance it as the lender. Not only is it advantageous to them (as we’ve discussed), but it also carries benefits to the buyer as well. Even if your credit as a buyer doesn’t make you a high-risk borrower to a more traditional lending institution, financing from the owner may give you a more favorable interest rate, especially if you’re already renting the property from them and keep it in good repair. Remember, the seller incurs surprisingly little risk; if you default on the loan, heaven forbid, then they get their property back. It’s a much easier sell, if you’ll forgive the pun, than most people might assume. You also have the advantage of relieving the seller from property taxes, insurance, and maintenance costs. Even though it’s still a risk on their part – a buyer could, for example, default on the loan after allowing the property to fall into disrepair – most buyers are surprised at the willingness of sellers to finance the home on their own terms.
As a buyer, if your credit isn’t quite where it needs to be to convince a traditional lender to give you a home loan, or if your credit isn’t enough to get you a decent interest rate, seller financing is something to consider before looking at hard-money lenders. Since interest rates are incredibly low right now, buyers can leverage that when setting the terms for their loan, and you may find that a seller is willing to give you a good interest rate for the sake of selling their home more quickly. Bear in mind that a seller/financer will need to check your credit (and if you’re the seller, you have every right and obligation to your investment to do this), but they’re also more likely to be forgiving regarding, say, medical debt if that’s the only mark against you.
As the economy grows, as employment maintains a steady and healthy rate, and as consumer confidence remains high, real estate as a market is booming. This means that not only are more homes for sale than usual, but there are also more buyers as well, which makes for a unique combination of a buyer’s and seller’s market, to everyone’s advantage. One thing we need to stress here is that even though seller financing can cut out the middleman and increase your profits as a seller or give you more favorable terms as a buyer, both parties still need to involve an attorney to take care of closing details, transfers, and legal agreements between them.
Next week, we’ll go into a bit more detail on seller financing vs. hard-money lenders, but until then, be sure to sign up for our email list, and don’t forget to follow us on Facebook and Twitter!
– Get It Right Solutions LLC