Seller Financing Explained
In an era of unprecedented interest rate hikes and inflation, these variables have forced many home buyers to improvise and get creative with how they acquire homes. Though you may think this was the inception of seller financing, the fact of the matter is seller financing has been around long before these rate hikes. Before the last few years, it was not uncommon to see seasoned investors and investors on large real estate deals use seller financing. However nowadays it seems to be much more common or talked about anyway. So what is it?
The simplest way I use to explain this is using a traditional mortgage. Just like you would normally make a down payment on a home, followed by monthly payments on an amortized schedule, seller financing works the same way. The only difference: The seller is the bank.
So lets say Ms. Smith has free and clear (paid off mortgage) on a house which she is selling for 100K. I offer Ms Smith 10K (10% down) and continue to pay her remaining 90K over an agreed upon schedule. The beautiful thing about all of these components (down payments, monthly payment, interest rate, and length of the loan) are ALL negotiable. In real estate, we collectively call these items “terms”. So you might hear a buyer say to the seller “Are you open to terms?” and that essentially means “Are you open to seller financing?”
So does that mean a home must be paid off “Free and Clear” in order to be financed by the seller? Absolutely not. An intact mortgage could be assumed by the buyer, this is called “subject-to” financing, as in the buyer purchases the property subject to existing terms and agreements. The same objective can also be completed using something called a “wrap around mortgage” which is essentially a promissory note that the buyer will make payments on the seller’s behalf. I won’t lie, this part of seller financing can get a little confusing to wrap your head around, but the most important thing to know is that it is possible, it is an option, and you want to have someone in your corner, ideally an attorney, that specializes in these types of deals and can help you navigate them.
So why do so many people love seller financing? Well, let me ask you this, what bank could you go to and attempt to negotiate terms? Odds are, not many. This is such a valuable tool to have in your tool box, because now you can potentially make deals work that would otherwise not have worked. For the buyer, by manipulating the terms of the deal, a bad deal can become a good deal. For the seller, this could mean getting a house sold that otherwise might have been difficult to sell. This is also great for sellers that don’t have much equity in their home, and would lose money by listing their home.
As you can see, there are many perks to using seller financing. It is an excellent option to keep in your back pocket and it never hurts to ask if the seller is open to this while house shopping. The worst they can say is no. Thanks for reading!
*Note: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education. The views reflected in the commentary are subject to change at any time without notice.
Nothing on this Blog constitutes investment advice, performance data or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person. From reading this Blog we cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Blog are just that – an opinion or information. You should not use this Blog to make financial decisions and we highly recommend you seek professional advice from someone who is authorized to provide investment advice.