Understand How Seller Financing Works and How It Is Useful
Seller financing means a seller is helping a buyer to buy his property. In simple words, the seller is agreeing to sell his property to the buyer in installments in the place of a one-shot payment. It can be considered as a loan that the seller grants to the buyer so that he can purchase his property in return. Any buyer who doesn’t have enough funds or simply cannot afford to buy a house can make use of seller financing.
As money is involved, there are both legal and illegal ways of doing this. However, it is advisable that if this trade is carried out legally. Only then it can provide security to both the buyer as well as the seller.
Best Part of Seller Financing:
- Lender is not required: As new rules and restrictions come into existence, getting loan or credit is becoming harder. In this case, if the seller himself is providing loan, the transaction becomes easier.
- Security: From the point of view of a seller, it can be said that he is giving an extremely secured loan. If the buyer is not able to pay him back, he can simply foreclose and get paid or he can get his property back to resell or rent.
- Better returns: When a seller is providing finance himself, he is actually converting his liquid assets into a secured hard asset. For this, he will get a good return because money in bank gets around 1% interest, while interest on a loan is 3-6%.
- Better Pricing: When you are trying to get a loan from an institutional lender, you end up paying several processing fees. On the other hand, in the case of seller financing, as the seller himself is providing loan, he cuts down all these expenses, and thus offers lower-cost financing.
Most Seller Financing Types:
In this type of finance, the seller is entitled to get at least one payment after the first tax year of the sale. This type of financing will leave the buyer a little unprotected because the seller legally owns the property till the last payment is made.
This is a little complicated deal because it needs the agreement of three parties, seller, buyer, and mortgagor. If the buyer qualifies for a mortgage loan, and the loan amount is less than the buying price, the mortgagor can allow the seller to take a second mortgage loan for the amount difference between the buying amount and qualified amount. This way the seller ends up getting the entire loan amount. Instead of this, it is advisable to go for a sale on contract financing.
Rent with an alternative to buy:
This is practiced when the seller is finding it difficult to sell his real estate. Here, the buyer signs an agreement which has the condition that in the future a part or all of the rent that he had paid to the property owner will be considered as the payment towards purchasing the house. In this system, the seller is protected as he can put a time limit on the lease. In this way, at the end of the contract, if the buyer is not interested in purchasing the property, the seller can sell it.
Generally, a real estate agent is involved and he represents the seller as well as the buyer. The agent himself provides essential contract documents, which have important financial terms and conditions explained in them. He also asks the seller to provide a seller financing disclosure. They also help the sellers in procuring property disclosure reports for natural hazards as well.
Along with the contract, the buyer needs to sign a promissory note that he will repay the loan amount as well as agrees with the terms and conditions set forth in the contract. Further, the buyer also needs to mortgage in order to give the seller the security, which can potentially prevent any defaults on the buyer’s side.