What is seller financing? How does it work in real estate?

Posted by Michael Oliver on Monday, January 23rd, 2017 at 1:05pm

Luxury home in Tucson Seller financing in real estate is a simple way to help or get a property sold. Seller financing is when the seller of a property also finances (also known as carrying the note) the purchase for the buyer. Typically the property is owned outright by the seller. The benefits to seller financing for both the buyer and seller are many. 

As a seller, financing allows:

  1. More buyers are available to buy when you offer them financing.
  2. By charging an interest rate you give yourself additional ROI on the transaction. (Seller financing typically carries a 2% to 5% higher interest rate than normal bank financing.)
  3. If the buyer fails to make the mortgage payments you will have to foreclose, but you get the property back. Foreclosure works just like a bank, assuming you have the proper legal agreements.
  4. Having a servicer will allow you as a seller to just get a check every month with all of the proper taxes, HOA fees, and any late fees etc taken out and properly sent out to the parties required. A servicer acts as the 3rd party in charge of handling the monies and everything required for this type of transaction you as the note holder just collect the net check every payment. Many escrow companies handle servicing for seller financing transactions. 

As a buyer; seller financing also offers quite a few benefits to you as well:

  1. Few if any loan fees. When obtaining a mortgage it's easy for the closing costs of the mortgage to run 2% to 4% of the purchase price. This adds up to thousands of dollars upfront. When there are little to no fees even a higher interest rate specifically in short term loans are far less expensive than normal bank financing. If you are looking to only live or own the property for a few years avoiding those upfront fees could actually make seller financing much less expensive than a traditional mortgage from a bank.
  2. Usually, no appraisal or appraisal fees are required.
  3. Closings can happen very quickly. I have done seller financing deals in about 20 minutes from start to end when everyone is in agreement about the terms. If you need to close quickly on a property seller financing trumps any type of financing available.
  4. If you are an International buyer-seller financing may be your only real option. We do a lot of seller financing for Canadian clients looking to buy winter homes here as the US banks make it about impossible for them to obtain conventional financing. Any International buyer should consider seller financing as it allows for a lot of flexibility in obtaining US property.

Seller financing for both parties should only be handled by an experienced and skilled real estate broker, as well as possibly a real estate attorney. These transactions can be complex and many possibilities need to be thought through completely before entering into one. As a real estate broker in Tucson who has handled seller financed transactions many times (from both the listing side and the buyer side) if you are thinking of buying or selling a home in the Tucson area with this financing I would be happy to discuss it with you.

-Michael

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