Owner financing is a transaction in which a property's seller finances the purchase directly with the person or entity buying it, either in whole or in part. This type of arrangement can be advantageous for both sellers and buyers because it eliminates the costs of a bank intermediary.
Possible foreclosure. If the buyer stops making payments and won't leave the property, you might need to start the foreclosure process, which could take months or even years.
Seller financing is a type of real estate transaction where a homebuyer enters into a financing arrangement directly with the seller, instead of borrowing a mortgage loan from a bank or another financial institution. It's also known as “owner financing” or a “purchase-money mortgage.”
Negotiation: The negotiation process is where both parties can find common ground. Buyers should aim to secure an interest rate that is as low as possible, while sellers should seek a rate that ensures a reasonable return on their investment. A fair compromise often lies somewhere in between.
Understanding Seller Financing
This financing method bypasses conventional mortgage lenders, allowing the buyer to make regular payments directly to the seller. The terms of the agreement, including the interest rate, repayment schedule, and consequences of default, are typically outlined in a promissory note.
Be Prepared to Propose Seller Financing
However, instead of asking if owner financing is an option, you might want to present a specific proposal. You could say, for example, "My offer is full price with 20% down, seller financing for $350,000 at 6%, amortized over 30 years with a five-year balloon loan.
Many seller financing agreements use a deed of trust. With a deed of trust, the buyer and seller agree to have a neutral third party hold the title. The trustee holds the title until the buyer meets their obligations under the agreement. Once that occurs, the trustee can transfer the title to the buyer.
Given the potential speed and flexibility of the arrangement, seller financing may also help the owner attract more prospective buyers for their property. Sellers may skip making the kinds of repairs typically advised when preparing a property for sale.
As a benchmark, if current conventional mortgage rates are around 6-7%, a seller financing interest rate might range between 3-5% on average. This range typically still benefits the seller by accounting for tax advantages, ensuring long-term passive income, and reducing default risk through manageable monthly payments.
Deal Doesn't Value or Has Poor Documentation
It either gets a valuation from the SBA that doesn't justify a full loan or the financial documentation might be so poor that the SBA won't fund the deal. In either case, these are red flags that the business might not be as valuable as it looks on the surface.
If the buyer defaults, the seller can repossess the property, as outlined in the finance agreement. This method benefits both parties by providing flexible terms and potentially faster transactions.
A buyer with owner financing might save some money on closing costs, but there will still be expenses to cover. This includes the cost of a title search and title insurance, which protects the buyer in the event the property has one or more liens on it.
Owner financing contracts generally include terms like purchase price, down payment (usually between 5%-20%), interest rates (often higher than traditional mortgages), loan term lengths (3-10 years), and repayment schedules. These components ensure both parties understand their responsibilities and rights.
The owner is also responsible for paying property taxes when a property is owner financed. If the buyer appears as the owner on the deed, they may be responsible for the property tax. However, if the seller is financing the property, they are still responsible for paying the taxes.
Dealers often recommend their own financing to earn larger profits. However, getting pre-approval from your credit union or bank can provide more control. It also allows for better interest rates on an auto loan.
Tax Deferral (for the seller): One of the most compelling reasons to consider an installment sale is the ability to defer capital gains tax.
If the seller finances part or all of a home purchase, the sale can be completed in a short amount of time. That can be advantageous to both owners who want to sell their homes quickly and buyers who don't want to wait for a traditional lender to approve them for a conventional loan.
Sellers who finance the entire sale will be the only lender and will be in the first position if the buyer defaults on the loan. Since the seller is in the first position, the seller will need to file a UCC lien on all assets to protect them.
In an owner-financed deal, the seller holds the deed to the property until the buyer fulfills all the contract terms.
Negotiation is a two-way street. Be open to flexible terms that align with both your needs and the seller's expectations. Discuss the interest rate, the duration of the financing, and any contingencies. Finding common ground on these elements can turn a hesitant seller into a willing participant.
Typical Seller Financing Terms
Terms for seller financing will commonly include: Loan Amounts: 30% – 60% of the purchase price (some sellers may do full financing with a substantial (15-20%) down payment) Term Length: 5 – 7 years. Interest Rates: 6% – 10%
Is There a Minimum Interest Rate for A Seller Financing Loan? The answer is YES! There is what is called the minimum Applicable Federal Rate (AFRs) which is sometimes called the “arm's length” rate. This is the minimum interest rate that a private lender can give without violating federal law.