Owner financing
SELLER FINANCING
What is seller financing in real estate?
Seller financing, also known as owner financing, is where a property owner allows the buyer to purchase their property over time rather than getting a loan from a bank or mortgage lender to buy it outright.
In a traditional home sale, the seller typically receives a lump sum from the buyer’s lender for the entire agreed-upon sale price at closing, minus closing costs and whatever amount remains on the seller’s mortgage.
With seller financing, rather than a single payout, the seller receives an initial down payment from the buyer plus a series of monthly mortgage payments. The specific loan terms are left entirely up to the homeowner and buyer.
Seller financing can be especially useful when a mortgage is hard to obtain, or a homeowner wants to expedite the sale process. It can also be beneficial when a seller owns their property outright and prefers a consistent cash flow over a single lump sum (often for tax benefits or the dependability of a monthly payment).
Alternative terms for seller financing
Owner financing
Owner backed mortgage
Holding a note
Owner carry
Owner backed mortgage
Holding a note
Owner carry
How seller financing works
In a typical real estate transaction, the buyer obtains a mortgage loan from a bank to finance the property. The lender provides the funds upfront to the seller, and the buyer then repays the lender over time through the mortgage, complete with set interest rates and terms. Seller financing follows a slightly different approach.
With seller financing, the original homeowner becomes the bank instead of going through a third-party lender. The buyer and seller enter into a contract in which the seller provides the mortgage directly to the buyer.
The parties will agree on loan terms like interest rate, repayment schedule, down payment, and other provisions. This is typically done through proper documentation, like a promissory note.
The property is used as collateral for the loan, and the seller keeps the title or deed until the loan is fully repaid. Once the property is completely paid off, the seller transfers ownership and title to the buyer.
Types of seller financing
Seller financing or owner financing is generally a simple and clear process. That said, it can be helpful to familiarize yourself with the different agreements under this umbrella.
1. Land contracts
Also known as a contract for deed, this approach often comes to mind when envisioning a seller financing arrangement. Sellers retain the legal title to the property until the buyer has paid off the full purchase price plus interest over the agreed-upon term.
The buyer will make periodic payments to the seller and take possession of the property but doesn’t officially get the deed until the final payment. Often, land contracts have a lump-sum balloon payment at the end of the loan term.
2. Rent-to-own
In the rent-to-own scenario, the buyer leases the property from the seller for a set period, with a portion of each rent payment going toward an eventual down payment on the home. After the lease period, the buyer can buy the property outright.
This setup can be particularly helpful if a buyer is looking to secure a property while also taking the time to improve their finances for a mortgage.
3. Wraparound mortgage
A wraparound mortgage is a distinct type of seller financing where the seller's existing mortgage remains outstanding. However, the buyer makes an additional mortgage payment to the seller, usually at a higher interest rate.
The seller then uses the buyer's payment to pay their mortgage with the lender, pocketing the difference as their income stream. From the lender's perspective, only the seller's original mortgage exists.
What are the advantages of seller financing?
Potential to maximize profits:
Sellers stand to earn interest on the sales price of their property, resulting in a potentially greater payoff compared to the traditional sales process alone.
Passive income stream:
Seller financing allows homeowners to receive a steady income stream over time. Plus, the deal is backed by the property, adding an extra layer of stability.
Tax benefits:
In many cases, sellers can defer capital gains taxes by structuring the sale as an installment sale, spreading the tax liability over multiple years.
Faster sale:
By providing financing, sellers eliminate the need to work with third-party mortgage companies, appraisal firms, and even realtors. With fewer parties involved, the sales process moves more efficiently and quickly.
Flexibility:
Sellers can tailor the financing terms to their preferences, such as the interest rate, repayment period, and down payment requirements.
Higher Sales Price:
The seller usually gets more money than they do through a traditional sale. The Seller also pays no commissions or Closing Cost
