How Does Seller Financing Work?

There are many ways to complete a real estate transaction.

Each consumer comes from different financial situations & backgrounds, so it’s very unlikely that two will ever be the same. The most common ways used to purchase homes are financing through a mortgage lender, financing through a private lender, or cash.

A rarely-used method of acquiring real estate is seller-financing. This means that the seller would be playing the role of the bank, with the buyer paying a monthly payment directly to the seller for a predetermined time & interest rate.

Let’s say the agreement was for 3 years. At the end of year 3, the buyer must re-finance into a conventional or commercial loan, and the seller is then paid in full.  One big prerequisite is that the seller must not carry a mortgage — they must own the property outright. When that’s the case, the seller has much to gain by becoming a lender.

Why might this kind of structured deal appeal to a seller?

The amount of interest that accrues by the end of the seller-financing period allows for a much greater return on investment. This is the very same method by which banks earn money.

A seller also may have expensive property defects or issues that would be red flags for appraisers. Seller financing does not require an appraisal, so a property can be sold in a manner that allows the buyer time to make the necessary upgrades, relieving the seller of the burden. While the buyer makes his monthly payments and takes all responsibilities for said property, the seller always remains in 1st position on the contract. If the buyer misses a monthly payment, the seller has the right to reclaim the property, as well as the downpayment and deposits.

In an aggressive market, I feel it is very important to stand out from the crowd. I have found that in some cases, being able to offer a method to purchase a property that has benefits for both buyer and seller has made the difference between winning and losing a potentially life-changing investment for my client.

Seller financing isn’t for every person or transaction, but in some situations, it’s the tool that seals the deal.