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The In's and Out's of a Seller Financing Transaction
How Seller Financing Works
Seller financing, also known as owner financing, means that you provide the financing for the buyer instead of them getting a loan from a traditional bank. The buyer makes payments directly to you, allowing you to maintain control and earn steady income from the sale.
Why Would any Seller do this?
Faster Sale - Attract more buyers, such as investors or people who may have trouble securing traditional financing(self employed)
Monthly Income: Receive regular monthly payments, creating a steady and reliable income stream(Just like if you had it as a rental, now without the headache!)
Higher Sale Price: You may be able to negotiate a higher sale price since you’re offering attractive financing terms, this sometimes allows an investor to buy the property for more(We like to call that built in interest)
Retain Control: You keep control over the sale and have the security of getting the property back if the buyer defaults secured by a deed of trust and promissory note, in which you could then resell the property again and keep all of the money the original buyer paid you/put into the property.
Setting the Terms:
Here are the key terms to consider when structuring a seller financing deal:
Down Payment
A down payment shows the buyer's commitment to the purchase. While traditional loans might require 20% or more, with seller financing, you have flexibility. We suggest a down payment of around 10%, which balances commitment with affordability for the buyer, making your property more attractive.
Monthly Payments
Principal-only payments can be beneficial as they allow the buyer to pay down the loan balance faster, without the burden of interest initially. This makes the deal more attractive and manageable for the buyer, increasing the likelihood of a quick sale. Sometimes interest can be factored in, however it will always be lower than what a bank gets(A buyer may as well get a loan if it was the same rate)
Loan Term
Consider a term that works for both you and the buyer. A common structure might include a balloon payment after a certain number of years (e.g., 10 or 15 years), where the remaining balance is due. This gives the buyer time to potentially refinance with a traditional lender and cash out the entirety of the rest of your equity.
Example Terms
To give you an idea, here’s an example of what your seller financing terms might look like:
Sale Price: $200,000
Down Payment: $20,000 (10%)
Loan Amount: $180,000
Monthly Payment: Principal-only payments of $750
Loan Term: 10 years with a balloon payment
Your Next Steps
Review the Example Terms: Think about what works best for you.
Consult Your Financial Advisor: Ensure you understand the implications and benefits.
Discuss with Us: We are here to answer any questions and help finalize the terms.
Seller financing can be a win-win situation, providing you with a higher sale price and steady income while making your property more attractive to buyers. We look forward to working with you to create a mutually beneficial agreement.
