Seller Financing: Pros and Cons For Buyers And Sellers.

Seller financing is when, instead of getting a loan from a bank, the buyer gets a loan from the seller for the purchase.

This type of financing can be a good deal for buyers and sellers under the right circumstances and provided that both parties are aware of the advantages and disadvantages for each.

Seller Financing Advantages for Buyers:

Good when a conventional loan is unavailable: For some buyers, it may be hard to get a conventional loan. Your financial situation may not fit into neat little boxes - perhaps you don’t have a predictable W-2 job and income, a stable employment history, or a good credit score. Sellers can be more flexible and creative than a bank, and allow for a buyer’s unique circumstances.

The closing process can be faster: You don’t have to wait for all the approvals that you would need in a bank.

Closing costs are lower: You do not have to pay bank or appraisal fees.

The down payment amount can be extremely flexible: It can be whatever you and the seller agree to.

Seller Financing Disadvantages for Buyers:

The mortgage period is often much shorter: The mortgage period is shorter (e.g., 5 years versus 30 years), so there may be higher monthly payments or there can be a big balloon payment at the end of the term (hopefully buyers can refinance before that point).

Typically higher interest rates than a bank would offer: This is an unusual type of loan and is often in high demand. The market often allows sellers willing to offer seller financing the ability to charge higher interest rates than the market rate.

Buyers still need to prove that they’re credit-worthy: In most cases, a seller still will want some evidence that making a loan to you is a good idea. Many sellers will default to credit rating, although in real estate sometimes they will simply want to ensure that they can foreclose on the property without a loss if you fall delinquent.

The buyer needs to make sure that the seller owns the property free and clear: Your due diligence duty becomes even more important because it will be up to you, not the bank, to make sure that the title on the property is unclouded. Fail in this and you might be buying yourself some legal troubles.

Seller Financing Advantages for Sellers:

Minimize carrying costs while waiting for the perfect buyer: Seller financing opens up the pool to more buyers, which may lead to a quicker sale and therefore less carrying costs.

Can get the deal done much more quickly: Without all the hoops of getting bank financing, a seller-financing deal may get done much more quickly.

Will distinguish the property from other listings: Offering seller financing can help you get a property sold faster (especially in a down market)

Increase the possibility of getting the full asking price: Because seller financing is an attractive option for buyers, you will likely be able to charge more if you are offering it.

May get a down payment to buy another property: You can simply require the down payment on the property you are seller financing to be enough to make a down payment on your next purchase.

Can ditch any monthly expense associated with owning the property: Seller financing offers the attraction of monthly payments (like rent) but without the hassles of property maintenance or property taxes. Just remember, at the end of the term of the note, if the borrower meets the requirements they will own the property, unlike a renter.

Seller only needs to pay capital gains taxes on money received: Seller financing can be much more tax beneficial than getting all the funds outright.

Seller financing allows the seller to continue to cash-flow on the property without having any of the headaches of property ownership.

Disadvantages for a Seller:

• Don’t get the full proceeds from the property at once: Have to make sure the buyer is credit-worthy - You can “hedge your bets” in this regard by making sure that the collateral is worth more than the loan.
  

These are the benefits and downsides of seller financing. Do you think this might work for you? Why or why not? Respond in the comments.

About Monick Halm

Monick Halm, founder of Real Estate Investor Goddesses, is an educator and advocate for female real estate investors, Her mission is to help 1 million women achieve financial freedom through real estate investing. To find out more about Monick and connect with her, go to www.reigoddesses.com.