Seller financing occurs when the real estate property owner finances the purchase of his or her home for the buyer. The seller can finance the entire purchase price or agrees to pay the difference between the buyers approved mortgage and the agreed upon sales price. Either way, the buyer contractually agrees to repay the seller monthly, with interest. Most seller financing is short term, five years or less, on the assumption that the buyer will refinance with a conventional loan with better credit and circumstance at that later time.
Certainly, there are pros and cons to seller financing for both the seller and the buyer. The chosen permutation and form of creative owner financing offered, negotiated, and accepted between the transactional participants need not be outlined here. It suffices to say there are far too many possible ways to construct a seller financed option to be enumerated here.
Savvy investors recognize the benefits and embrace those benefits, both as sellers and buyers, of owner financing. Certainly, arguments can be made that the advantages to one party speaks to the disadvantage of the other and while that can be true in each instance, this creative alternative to conventional financing can be a win-win for both and the only way a deal can be done.
Sellers always seek the highest price they can get and prefer a cash closing every time. For the investor, whether as a seller or a buyer, realizing that a seller can often receive a higher than fair market price, perhaps the highest price possible, by offering flexible owner financing. There is a premium to be had for the seller when the buyer seeks non-qualified financing at the same time the seller seeks a higher than market price for the property. Most buyers simply cannot qualify for conventional financing, so they are willing to pay more for the property to get the property.
Offering cash is huge. Most buyers and most investors will not, absent a significantly lower cash price well below fair market value. Many sellers for tax and other reasons, prefer cash flow over time and are not pressed to accept a low balled, discounted cash offer, preferring a higher purchase price with cash deferred. A win-win for both is the result. To have a quick and unfettered closing is another big plus. Qualified buyers are harder to come by and movement of the property may be slow indeed, particularly if the location or house condition lessens its marketability. with the house languishing on the market month after month. The seller is not only competing with all the other homes for sale, but must contend with continued holding and maintenance costs, month after month, and that can be very costly. Even with a qualified buyer, conventional loans take months to clear to close. Sometimes they don’t and the seller still has not moved the property to his or her continued detriment.
Creative flexible owner financing can help move a property very quickly as the conventional lending requirements of appraisals and surveys, underwriting, and all the costs attendant to conventional loans including points, origination fees, and all other charges, amounting to thousands of dollars, can be avoided. There can be significant tax savings employed with properly structured owner financing and many a transaction never requires broker and realtor fees, saving 6% of the purchase price on the average.
With each transaction, the parties must weigh the advantages and disadvantages. For the seller, there are required disclosures and paperwork to contend with and compliance with state and federal law. Sellers must abide by Dodd Frank which regulates consumer purchases of real estate and may or may not be applicable. Most sellers offer short term seller financing to allow the buyer time to refinance and the structure of the owner financing and the circumstances of the seller may pose a problem to that seller under Dodd Frank.
The bottom line is that there is more than one way to buy or sell a house. Seller financing, with a nontraditional loan may be the right move for both the seller and the buyer. Being due diligent is always a must, for both the seller and the buyer, and once they can come to an agreement, seller financing may be the very best solution for both.
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