WHAT IS SELLER FINANCE? “Seller Finance” is an agreement in which the seller agrees to sell the property to the buyer by structuring a loan that the buyer will pay off over an agreed amount of time. This agreement is very similar to getting a loan from a mortgage lender, except the seller and buyer can create and negotiate their own terms including price, monthly payment, and loan length, amongst other possible terms. There is no bank involved in the transaction and therefore the buyer, seller, and property do not need to qualify for traditional lending requirements.

HOW DOES SELLER FINANCE BENEFIT THE SELLER?

•The seller can potentially obtain a higher offer price than a traditional offer.

• By accepting payments, the seller can create truly passive income.

• The seller can structure terms to best fit their financial and lifestyle goals.

• Can minimize capital gains taxes and spread out depreciation recapture over time.

• The transaction can close quicker and without financing contingencies.

• The property does not need to qualify for traditional lending, can sell in “As Is” condition.

• NO dealing with banks, YOU BECOME THE BANK!

WHAT ARE THE DISADVANTAGES OF SELLER FINANCE?

• The seller does not receive the purchase price of their home in one lump sum payment

• May not be a good fit for a seller looking to pay off large sums of debt.

• May not be a good fit for a seller looking to buy a new property in cash.

• Does not work for a typical 1031 exchange, but you can do a 1031 accrual account.

• Unless a short term is negotiated, an older seller may not see all of the equity from the sale in their lifetime. However, payments can go to the estate or heirs of the note.

• The hassle factor of managing monthly payments in a loan servicer company is not used.

WHAT HAPPENS IF THE BUYER STOPS PAYING?

• So long as the property is in good condition, this is good news for the seller.

• After 60 days of nonpayment (depending on the agreement) the deed to the property will be transferred back to the seller. It is important to draft the note so that foreclosure is not required, and the deed transfer is seamless.

• The seller will retain all previous payments from the buyer, and regain complete ownership and control of the property.

• The seller can resell the property, potentially at a higher price if the market has improved.

WHAT IF SOMETHING HAPPENS TO THE HOME?

• Accidents happen including home fires and natural disasters.

• The buyer is required to carry home insurance on the property for this very reason.

• As the seller, until the note is paid off, you are listed as an additionally insured party.

• If something happens to the property, your interests are fully protected by the insurance policy.

CAN I SELLER FINANCE IF I HAVE A MORTGAGE?

• In short, yes you can!

• One option is that the buyer can provide a down payment large enough to pay off the seller’s existing mortgage.

• Another option is allowing the buyer to assume the existing mortgage note, called subject to. Mortgage note assumptions presents additional benefits and risks to the seller outside of seller finance that should be explored before considering this option.

SO WHO OWNS THE HOME?

• Ownership of the home operates in the same way as a traditional transaction.

• The buyer has full ownership of the home.

• The financier (the seller) will retain a primary lien on the home.

WHAT DO TERMS TYPICALLY LOOK LIKE?

• There is not necessarily a ‘typical’ set of seller finance terms.

• If the seller is looking to make a good return, they may negotiate a higher purchase price.

• If the seller is looking for a fast return, they can negotiate a shorter term on the transaction.

• Alternatively, a buyer will often focus on negotiating a reasonable monthly payment.