If you’re like many people out there and you have heard about Seller Financing (same as Owner Financing) but not really sure how it works, I’m going to break it down for you in this article and give you the Pros and Cons. And, I will go over how this looks from the Seller and the Buyer’s perspective.
First of all, when a homeowner sells their home through an agent, the buyers are usually everyday people who are trying to get a mortgage to buy a house that they will live in. In some markets, there are a lot of these kinds of buyers but in other markets, there aren’t as many. And real estate agents typically work with these kinds of “pre-qualified” buyers who CAN get a mortgage through a bank. There can be problems associated with this method though. For example, sometimes you have to wait to see if a buyer can even get financing and if the financing falls through you’re forced to keep showing your house to find another buyer.
These factors combined with others could be what has you searching for another alternative, and selling or buying a house with owner financing might be the solution you’re looking for.
Seller financing is when a buyer skips the bank and buys directly from the owner. Basically, the seller is the bank! Just like a bank, a note is created that specifies the terms involved and then they get an up-front deposit and regular payments that pay towards the balance owed. They might also add interest just like a bank. In most cases, the owner holds the title until the house is fully paid off, and then the title transfers to the buyer. Just like buying a car!
Let’s break it down and take a look at the Pros and Cons.
Pros of Seller Financing
For Sellers:
- This will give you access to many more home buyers because now you’ll be able to find buyers who can’t currently get bank financing.
- It provides cash flow since the buyer will need to pay regular payments to you (just as they would need to pay regular mortgage payments to the bank).
- You are still protected because even if the buyer stops paying, you still own the house! The deed is still in the seller’s name, unlike a traditional mortgage.
- No property management since that will be the responsibility of the buyer.
- Helps spread out the tax bill over time instead of one Extremely large payment. The seller can also add interest to offset some of the taxes owed for the sale of the property. Consult CPA!
- If at some point you need cash, you can sell the note!
For Buyers:
- Helps buyers get into a home that they are buying instead of renting when they can’t get a traditional bank mortgage.
- The down payment is not government regulated and can be lower based on the seller’s needs.
- No bank fees or appraisal costs which means cheaper closing.
- No bank approval process which means faster closing.
Cons of Seller Financing
For Sellers:
- The buyer could stop making payments but NOT leave the property. At that point, you would have to start the foreclosure process. Usually faster without banks involved.
- If you have to take back the property there could be repair and maintenance costs involved.
- Dodd-Frank Act. Depending on certain factors you may need to hire an MLO (Mortgage Loan Originator). If this is a property that you do NOT live in and you don’t need to include a balloon payment you may NOT need an MLO. Also, you are limited to 2 or 3 of these transactions per year. Consult with a qualified Real Estate Attorney!
For Buyers:
- You might pay higher interest than you would at a bank.
- You will still need seller approval as they will be your lender.
- Due on Sale clause could pose a problem if there is a mortgage on the property and the seller’s lender does not approve the transaction. Always ask the seller if they have a current mortgage on the property. This is not an issue if the property is owned free and clear.
- Balloon payments. Some seller financing arrangements have a balloon payment due after a certain number of years with payments based on 30 yr amortization (Keeps payments low). If you can’t secure a bank loan by then, you could lose all the money you paid up to that point, and the property.
As you can see there seem to be more benefits for the seller than anyone, but everyday people that need time to fix their credit and would rather put their money into a home that they can own rather than renting are really benefiting as well. Even if the buyer is paying higher interest they are starting to build equity which would not happen if they continued to rent.
Hopefully, this clears things up for you whether you are a buyer or a seller. And, all parties involved should always seek the advice of a Real Estate attorney to ensure that the process is done right.
Here at VanWest Homebuyers, we love to buy homes and multifamily properties that are seller financed so fill out our form if you have one to sell!