Seller Financing Real Estate 101

Key Takeaways

• Savvy investors should seek to understand seller financing and when to use it.
• Seller financing real estate strategies can be mutually beneficial for buyers and sellers.
• There is often more flexibility involved when it comes to seller financing mortgages.

As a real estate investor, it is crucial to keep all of your options in mind when it comes to selling or buying a new property. There are numerous non-conventional financing methods that can offer unique benefits, no matter what side of the deal you are on. Among these opportunities is seller financing, a process that essentially eliminates the middleman and allows buyers and sellers to negotiate more directly than a traditional loan. Keep reading to find out if seller financing is something you should look for in the future.

What Is Seller Financing

Luckily seller financing is exactly what it sounds like: the seller provides the financing rather than a bank or mortgage lender. Seller financed homes will be paid for by the buyer the same way any other property is bought and sold, except without directly going through the bank. Instead, the previous owner will act as the bank and will receive payments directly from the seller. On a surface level, the process may not look dramatically different to a buyer. They are granted a loan and timeframe to purchase the property, although there may be lower barriers to entry than a traditional mortgage. What is unique about a seller financing mortgage on the other side of the spectrum, is that it provides sellers with incremental cash flow rather than a lump sum when a property sells.

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Seller Financing Calculator

The most important thing to remember when calculating the payments for a seller-financed mortgage are that the terms will depend on what the buyer and seller agree on beforehand. Therein lies one of the biggest perks seller financing offers: flexibility. Buyers and sellers alike will have the opportunity to negotiate the details of the contract and loan.

That being said, a seller financing contract will be different than a conventional mortgage in terms of requirements and stipulations; however, it can still be just as straightforward. In fact, determining the payment amounts for a seller financed loan is as simple as plugging the terms of the loan into an existing mortgage calculator.

In order to fully make use of a seller financing calculator, you will need certain information at hand. Be sure to determine the basics, including the purchase price, interest rate and time frame of the loan. The goal in seller financing mortgages is to find an agreement that benefits both the buyer and seller. So while some of these factors are negotiable, keep in mind that both parties will be acting to protect their bottom line.

How Does Seller Financing Work?

When it comes to seller financing, the buyer will typically sign a promissory note to the seller with information on the interest rate, repayment schedule and consequences for defaulting. Sellers will often not require buyers to jump through the same hoops when compared to getting a loan through a bank. However, seller financing does often occur over shorter periods of time when compared to traditional mortgages.

In order to find seller financing homes for sale, investors should look out for a seller financing addendum added to property listings. If you are an experienced investor, you may know this is uncommon. That means buyers on the hunt for seller financed properties should be prepared to ask, even if seller financing is not offered up front. It is also important to consider that seller financing can sometimes come with higher interest rates or balloon payments. So while you can avoid the requirements of a traditional mortgage, seller financing is not to be taken lightly.

There are some other stipulations to seller financing; the biggest is commonly known as a seller financing clause, or a “due on sale clause.” This is a legal portion of mortgages that grants banks the right to demand the loan immediately, in full if a property is sold. So what does that mean for the parties involved? If a property is not fully owned by the seller they will have to pay out the bank for the existing mortgage upon selling the house. Therefore, seller financing typically does not work if there is already an existing mortgage on the property in question. As a buyer, you should focus on sellers who don’t have a mortgage.

With these factors in mind, you may be asking yourself an important question: Why choose seller financing? The answer is that, despite the possibility of a seller financing clause gone wrong, there are numerous benefits to this form of financing, for both the buyers and sellers. Seller financing should simply be thought of as one of many options you have as an investor.

Seller Financing As A Buyer: The Benefits

• Opens up possibility of purchasing more properties
• Seller financing does not appear on your credit report
• Prospect of a smaller or nonexistent down payment
• Closing process is made easier, faster and often cheaper

When you elect to purchase a property through seller financing, you eliminate the need for going through a bank. Perhaps one of the greatest benefits of buying a home through seller financing, is that you will not be forced to meet the same eligibility requirements. This can mean the difference in becoming a homeowner for a lot of people. All things considered, the seller will likely require a good credit history, but it can be easier to work something out directly rather than going through traditional financing.

By opting for seller financing, the debt will often not appear on your credit report. For investors with a less than stellar credit history, or even those with multiple investments, this could open up the opportunity for multiple investments in the future. Similarly, by negotiating directly with the seller, there is the possibility for a smaller or nonexistent down payment. Depending on the seller’s financial situation and wishes, you may not be required to put down the same amount of money typically asked by banks.

Without the bank, seller financing can also mean an all around easier closing process. There will be time involved for the buyer and seller to negotiate the terms of the deal; however, these will not be the same hold ups one encounters when applying for a loan through a bank. This can save busy investors from the headache of a complex closing negotiations.

Seller Financing As A Seller: The Benefits

• Seller financing can make your listing stand out
• Possibility of a better interest rate
• Monthly income
• Spread out tax payments

If you are having trouble selling a property, perhaps one of the most important benefits of seller financing is that it can attract new attention to your listing. While it may not be what you had in mind initially, seller financing can help sell a property that just won’t go. Investors are attracted to seller financed properties for a number of reasons. Therefore, it could create multiple offers for your property and even help secure you a better interest rate. Like I’ve said before, there is no need to go through a bank for seller financed homes, meaning you can negotiate the terms of the deal more directly and efficiently.

One of the biggest perks involved in seller financing is the prospect of monthly income. For investors looking to take a step back, seller financing can provide the perfect opportunity to do so. Buyers will be making direct payments to you, and the property is completely out of your hands. It can be helpful to think of it as a passive income situation.

Finally, another great benefit to seller financing is that your tax payments may be spread out accordingly. When you traditionally sell a home, sellers will be taxed accordingly for the amount of money. Lucky enough, the IRS has tax regulations in effect for seller financed properties or installment sales. This can benefit sellers by requiring them to pay off small portions of the tax bill each year as the loan is being paid off, rather than all at once.

This should not serve as an exhaustive list of benefits for buyers and sellers, nor should it convince you to choose seller financing for every deal moving forward. Instead, seller financing should be thought of as another tool in your toolkit as an investor. Non conventional financing often represents increased opportunities for investors, and it should be considered as such. You have options when it comes to buying or selling a home, you just need to make sure you know how to use them.

Have you ever opted for seller financing? Were you a buyer or seller? Leave us a comment and share your experience with fellow investors.