What is Seller Financing?
Seller financing is when an owner/seller puts their property up for sale with themselves acting as the financier of the property, rather than a banking institution. There is no bank involved as in traditional home sales—instead of a bank mortgage, a buyer would pay the seller a mortgage. This has numerous advantages to owners seeking to sell their property and buyers looking for less restrictive options. Therefore, you as the seller, has more options. You are negotiating directly with a buyer to set the terms for down payment, the interest rate you are seeking, the monthly payment (their mortgage payments to you), and amortization.
Perhaps in this instance, a 30 year loan is not appealing to you as a seller, because this is an investment for you—you can shorten the amortization by requiring larger monthly payments or scheduling a balloon due date.
Owner financing is not a very well-known alternative to selling one’s property, for most American homeowners. Only around 10%-15% of properties that are sold are done so via seller financing.
Why is this low cost and quick real estate investment more common?Due to the lack of common knowledge about this type of real estate investment, this excellent alternative is not understood by many property owners. Most property owners do not know the benefits of seller financing, but with a little education, this blog post can help get you started with an introduction and information to get you started with this niche topic.
Advantages and Benefits of Seller Financing for the Property Seller
There are no loan costs to worry about, so a buyer can put the money they save up on mortgage insurance premiums, a down payment, building equity, on origination fees, or underwriting fees, to name a few. Closing costs are also lower or non-existent, as well as quicker, as opposed to conventional selling.
In addition to fewer costs, there are also reduced restrictions. The restrictive lending requirements of banks and mortgage companies do not apply to owner financed properties.
A major advantage to owner financing is having a secure asset. The balance of the purchase price is collateralized by the property itself, rather than a banking institution. If a buyer stops making payments, the seller/owner financer can take back ownership of the home.
An advantage that protects an owner/seller’s future interests is the property acting as a liquid asset due to owner financing. This means somebody can purchase the note, the mortgage, trust deed, or contract on the open market, from you. In essence, this means that the seller that is financing the buyer can decide to sell their future payments (similar to the idea of selling stocks), to a note investor or note buyer. This is an incredible advantage as the seller does not have to commit to the property for life.
By acting as the financer, the seller receives steady income in the form of interest. Buyers find themselves paying the seller 3 to 4 times the amount in mortgage payments due to interest, versus the amount they would pay if they had a banking mortgage. This allows the seller to receive passive income without doing any extra work.
Seller financing is not perfect, of course, and situations can occur that should be avoided. For example, we strongly recommend not using seller financing if your property is not owned free and clear—this is extremely important. You are acting as the bank and your buyer would be paying you a mortgage. You must own your home to reap the benefits of seller financing. Trying to commit to this alternative when you do not own your home is very risky for you.
If you end up facing foreclosure or your buyer stops making payments, the mortgage note goes into default and foreclosure proceedings begin. Case in point: make sure you OWN your home completely and do not still the bank or your mortgage lender any money. A free and clear home is the best, and only way that you proceed with seller financing.
Instead of selling your home and getting the banks and real estate agents involved, you can make a long-term investment that offers you current incentives such as passive income, stability in the form of a liquid asset, and future choices such as selling your mortgage note at any time and receiving a lump sum of money at any time. It is also rather risk-free, because if the owners stop paying their mortgage to you, you can reclaim ownership of the home and sell it on the market or sell your mortgage note, whichever pays off better.
Consider your alternatives other than traditional rental properties or home-selling. This can be an incredible investment that is both unique and lucrative. If interested in seller financing, we recommend seeing a real estate attorney. They can help you determine if it is right for you and can help you set up terms on the mortgage note.