Seller financing is a loan given by the seller of a property to the buyer as no cash is changing hands. Rather, seller financing is the sale of the property in installments covering part of or even the entire sale price. In that manner, the seller receives payments for his/her equity in the property rather than a return of actual cash at the time of close of escrow. Seller financing, also known as owner carry back or owner financing, is used in a variety of situations as a creative financing option.
An owner carry back can be used as a vehicle to sell a home if the potential buyer does not qualify for a loan that will cover the full cost of the property. Typically the owner carrying back secured by a trust deed which has substantial equity in the home, but this is not always the case. There are no universal requirements mandated for seller financing. Instead, each seller sets his own standards
There are some deals that just simply cannot get done with conventional lending because the credit markets are…too tough for a particular buyer to qualify or because the type of transaction is too risky.
There could also be a situation in which a buyer may not have sufficient capital for a down payment, partial seller financing, in that case, can help fill in the gaps in closing a deal.
In addition, the benefits of owner financing can appeal to sellers who are trying to unload property. Closing a deal on a house, for example, may take considerably less time with seller financing than with conventional financing. While a conventional lender will scrutinize the collateral property to determine the level of risk, a seller who is already familiar with the property can form his or her own risk assessment relatively quickly.
Financing as an installment sale can have tax advantages
Seller financing may also be an
attractive choice for investment, potentially offering
high rates of return. A seller can negotiate an
If the seller structures the loan as an installment sale, there can be certain tax advantages to the seller as well in terms of...the timing of recognition on the capital gain. The seller would need to discuss the details with a tax advisor.
Seller financing can be used to pay for a property either in full or in part. The terms of a full loan look similar to those of a conventional loan; however, a seller has a great deal of freedom in setting the terms, such as the interest rate and the duration of the payment period. For instance, a seller might wish to provide seller financing as a short-term arrangement of five years, after which the borrower is expected to refinance the loan, “presumably with conventional financing.
While sellers can be
more flexible than banks in considering prospective
buyers, they should nevertheless think like a bank when
reviewing potential buyers. Examining documents and
reports such as tax paperwork, proof of employment and
Although partial seller financing offers similar flexibility, it can be more complicated because of the three-way relationship created between the seller, buyer and conventional lending institution. In most cases, the conventional lender will assume first position in a default scenario.
Usually, but not always, Seller Financing is a short term agreement. Sellers typically extend a 30 year amortized loan with an at or an above market interest rate. A Balloon Payment is usually due within 1-5 years. Which means the buyers will need to pay off the entire remaining principle within the agreed time period. Unless the buyers have the ability to pay the principle in cash then most likely they will need to refinance through conventional methods or sell the home or be in danger of foreclosure. Sometimes the sellers will offer up to 30 year financing but it is very rare.
Example : David and Sara have found the perfect home which happens to cost $325,000. They go to Their local Bank and apply for a loan, but because of their credit score and the state of the housing market, they can only get approved for $250,000. David and Sara speak with their real estate agent then informs them that the owner is willing to carry back part of the purchase price, meaning that John and Linda will have a mortgage from the Bank for $250,000 and a private mortgage with the owner for the remaining $50,000.
In this case, John and Linda will be repaying two parties for ownership of the home. The $250,000 from the bank will be paid back according to the interest rates and schedule determined by their Bank. The $50,000 the owner will carry back will be paid by David and Sara either directly to the owner, or through a third party servicer with all the terms and conditions agreed upon by both David and Sara and the owner.