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What and How Seller/Owner Financing Works

Article writer - Emme  image

Are you a property owner looking to sell, but having difficulty finding a buyer? Or a potential investor but undergoing trouble securing financing? Well, worry less because the article has got you covered, as it explains in details what real estate seller financing entails.

As a seller, the prospect of closing a deal on your property can prove to be a daunting task particularly if borrowers are finding it tough to get loan approvals. On the other hand, as the buyer, getting a mortgage is always an intimidating task perhaps if your salary is unpredictable or if your employment status is unstable. This is why it would be wise and helpful to find an alternative option to complete your transaction. Ultimately, that option is the little-known, seller financing. It can aid you to sell or buy a property with ease!

What is owner financing?

Just as the name suggests, owner financing involves the buyer finding financial aid from the seller. To be much more precise, the seller lends the buyer the purchase price of the property. In a bid to make things more formal, the parties involved execute a financial instrument known as a 'promissory note'. This particular note contains a written obligation by the buyer to pay the seller the borrowed money at a certain rate for a specified period. It contains all the terms regarding the indebtedness of the issuer to the note’s payee, including maturity date, the amount, issuer’s signature, interest rate, date and place of issuance and a host of other vital documentations that may be deemed necessary.

As the buyer, you are required to provide your monthly mortgage payments regularly to the seller. Through this way, the seller gains interest on the loan slightly at a higher rate than what he would get elsewhere. In some cases, the seller may choose to sell the loan, and this implies that the purchaser will have to make his/her monthly mortgage payments to the investor who bought the loan.

It is essential to note that owner financing arrangements are always on a short-term basis, such as five to ten years, with a balloon payment expected at the end. And if you are wondering what a balloon payment means, it refers to a large payment due at the end of a mortgage, commercial or other types of amortized loan. The assumption is that the buyer will be in a pole position to refinance before the expected time. Though only in rare situations, such arrangements, if you are not that careful, can seriously fail.

It has been proven that owner financing is more common only in markets where mortgages are hard to access. Why is this so? Apparently, there are two main reasons for this including;

2. Home sellers may be forced to explore alternative options when selling becomes quite desperate at the time when the credit is strained or tight.

1. If mortgages are easy to come by, but a potential buyer cannot access one, the seller is likely to doubt the ability of the purchaser to pay. This implies that when bank loans are difficult to get, there is an increased likelihood that there might be qualified prospective buyers who are having difficulty obtaining traditional financing out there.

Pros and Cons of seller financing to the buyer

The Pros.

Seller financing offers lots of advantages to the buyer, including

3. Lower closing costs.

Most buyers go for seller financing mainly because they are likely to get the property for incredibly much lesser amounts. Precisely, they will not have to cater for the bank fees plus the appraisal costs.

2. A faster closing process.

Wise sellers and buyers are more likely to use the closing period to carry out their due diligence. Due diligence or simply DD, as mostly known by many, is an audit of a potential investment, conducted to confirm all the material facts regarding a sale. It encompasses a review of all financial records, and anything else deemed critical before the sale. When you are a buyer opting for seller financing, the closing period is likely to be shorter. Why? There is no additional time wasting, as in the case of waiting for an underwriter, the bank loan officer, and legal department to clear your file when dealing with bank loans.

1. The flexibility of the down payment amount.

 In the case of the seller financing, the buyer will not be required to meet a government-mandated minimum or a bank, bearing in mind that the amount of down payment can be anything that both the buyer and the seller agrees upon. However, this does not entirely imply that the seller will settle for anything much lower than the down payment the buyer would be needed to pay elsewhere, even though there is always such a possibility.

The Cons.

There exists notable few problems that are likely to arise when dealing with seller financing. They may include:

The Possibility of paying a higher interest rate.

The truth is that as a buyer, you are likely to pay an interest rate higher than what you would have paid when dealing with the bank. This is what makes the seller want to lend you the money, instead of investing elsewhere.

As a buyer, still, you must prove that you deserve the service.

A buyer and the seller might resolve to eliminate the bank out of their question. But, if a buyer does not qualify for the traditional mortgage, there could be a genuine reason as to why! The seller may also wish to know that reason and may not want to lend such a person, either.

The original seller could sell the promissory note.

Even though not considered that much dangerous, it only implies that the individual the think thinks will be receiving the mortgage payments might change. This is a common thing as it also happens with the traditional mortgages.

Pros and Cons to the seller.


Seller financing not only offers benefits to the buyers alone but also provides benefits to the seller as well.

5. It enables the seller to differentiate the home from other listings and get it bought faster, particularly in a flat market.

4. It allows the seller to minimize the carrying costs as he waits for the perfect buyer with a better deal.

3. It makes the seller surrender the monthly expenses associated with being the house owner.

2. It increases the chances of acquiring the property’s full asking price.

1. It gives the seller the possibility of getting a down payment for purchasing another property.

The cons

Perhaps one of the major drawbacks of the seller financing to the seller is that there is the possibility of the risk of the buyer refusing to honor the purchase terms. But in most instances, this problem can be stopped during the initial purchase process, by the seller requesting personal and collateral guarantee for security.

Why you as an investor, should opt for seller financing to keep the cash flow.
As a beginner investor, it is quite advisable that you should always look for seller financing to enable you to maintain the cash flow.

Here is why:

As a beginner, you are not likely to access the traditional financing due to the factors at hand. Many banks are not that quite flexible with their loan terms. However, with the help of seller financing, you are primed to mortgage terms face-to-face with the seller, therefore giving you an opportunity to present your case. Additionally, there are incredibly fewer costs without a traditional lender.

Also, rather than a down payment that is standard as required by the banks, you as an investor, can finance the entire purchase of the property or offer a lower down payment for the seller. This makes you enjoy the peace of mind, which is mandatory for anybody willing to have a successful business career.

Why is seller financing not common?

Many sellers often don’t want to engage in seller financing arrangement claiming they don’t have the money to lend to a buyer. Individual sellers simply say that they don’t want to become lenders since it is deemed a risky process. The other reason why owner financing is not common is that many sellers require the full proceeds from their home sale, for them to acquire their next home.

However, according to Daniels Robin, a property investor and landlord in the central Florida, sellers are afraid of selling with seller financing, mainly because they don’t understand that the note they hold can be sold to someone else. This could be done on the same day as closing, so the seller acquires the cash instantly.

The final reason why owner financing is uncommon is that most individuals are not that familiar with it.

The Final Verdict.

There are numerous ways of either buying or selling a property. Just because banks and other lending institutions cannot approve you does not imply that you cannot sell or buy a house. And due the fact that your financial status is below the standards required by the traditional lenders does not necessarily mean that you cannot purchase a property. With seller financing at your disposal, as a buyer, you can easily acquire the funds you need actually to make the purchase. As a seller, owner financing is likely to bring more prospective buyers, thereby increasing the value of your property.

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