What is seller financing?
Seller financing is when a real estate seller helps to finance a real estate transaction by taking back a second note. It can even mean financing the entire purchase if the seller owns the home free and clear. Usually, sellers do this when a buyer has trouble qualifying for a loan or meeting the purchase price.
Seller financing is different than a traditional loan or real estate mortgage because the seller does not give the buyer money to complete the real estate purchase. Instead, the seller extends a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller’s favor.
If you are a seller, the risks you face are the same as those faced by any lender: Is the borrower a good credit risk? Will the property hold enough value over time to allow for the repayment of all the loans made against it?
The necessary paperwork is prepared by the title or escrow company after the terms are worked out between the buyer and the seller. If you are a considering such an arrangement, make sure to thoroughly evaluate the credit-worthiness of the buyer. Fear of default makes many sellers reluctant to take back a second note, but it can bring a higher sale price and can often move the sale along faster. For more info, contact the IRS for a copy of its Publication 537; “Installment Sales.” Order by calling (800) TAX-FORM.
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. Seller financing can bring a higher sale price and move the real estate sale along faster in some situations.
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. It is wise to consult a lawyer when putting together this kind of transaction.
How are the rates set for seller financing?
The interest rate on an owner-carried loan is negotiable. Ask your agent to check with a lender to determine the current rate on institutional real estate loans. Seller financing typically costs less because sellers don’t charge loan fees (points). Interest rates on an owner-carried loan will also be influenced by current Treasury bill and 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.