With the recent events of Covid-19, banks have become a little more stringent with underwriting guidelines. As a result, some investors have decided to “stay on the sideline” until there is a little more clarity into the economic and political horizon. Consequently, we are seeing more transactions completed using alternative financing options such as seller financing.

Seller financing is when an owner acts as the bank or lender to sell his or her property. A buyer will take ownership of the property and take title, but the seller lends a portion of the money to a buyer – thus becoming the lender or bank. A buyer will make installment payments, usually on a monthly basis, over a specified time and agreed upon interest. Once the agreed upon time ends, the buyer can either renegotiate new terms with the seller or pay off the entire lump sum.

It is important to note that it works best when the property is owned free and clear. If you sell a property but owe the bank money (mortgage), you may need to pay the loan or the bank will foreclose on the property. This is called the “Due on Sale Clause.” An owner pays off the loan amount upon the sale of the property. A buyer may purchase a property with seller-carry terms, but it can be risky because if the bank becomes aware of the fact that the property exchanged hands/ownership, it can demand the loan be paid off immediately.

Why is it Advantageous to a Seller?

• Can ask for the full price or higher
• May qualify for certain tax breaks
• Potentially achieve more monthly income than what was currently collecting
• Can charge a higher interest rate
• Eliminates possible repair costs because selling “as-is”
• Can sell the loan – called note buying
• Attract larger buyer pool

Why is it Disadvantageous to a Seller?

• Cannot receive full equity payment until agreed upon terms expire
• Buyer may default on property
• Buyer defaults and property requires work
• Potentially receive less monthly income than what was currently collecting
• Cannot 1031 exchange at that time
• Attracts some buyers than are not qualified

In my next post, we’ll take a look at this from the buyer’s perspective and discuss the pros & cons for a buyer when it comes to seller financing.