I've seen seller finance deals at 5-6% - which is attracting buyers who would normally get approved for a traditional mortgage. The down is usually 20-30% - and some are even extending terms over 15 or even 30 years.
Average length of note: Five years, but it varies from three to seven years. Average down payment: Usually 50%, but it varies from 30% to 80%. All cash deals: Less than 10% of businesses sell for all cash.
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.
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.
What are the IRS rules on owner financing? When using seller financing, the seller does not have to pay taxes on principal repayments made by the buyer. Taxes are only paid on interest income that the seller earns from this type of arrangement. The interest will be taxed by the IRS as ordinary income.
Risks and Downsides of Seller Financing
If they default, the seller can repossess the business but a disruption is likely. No Bank Diligence: Unlike a bank, the seller does not do formal due diligence on the buyer's finances. This information asymmetry exposes the seller to higher default risk.
Who Holds the Deed in an Owner-Financed Deal? It depends on how the deal is structured, but often, the owner holds the deed until they are paid in full—which happens when the buyer either makes the final payment or refinances with a mortgage from another lender.
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.
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.
On average, the seller is done within 5-20 minutes. Often, the seller will pre-sign their documents and have the proceeds from the sale transferred via wire, so they won't even be present during closing. Typically, the seller only has to sign a few documents, such as the deed and the closing statement.
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.
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.
Seller agrees to provide financing to the Buyer under the following terms and conditions: Loan Amount: $____________________ Down Payment: $____________________ Interest Rate (per annum): ____% Term: ____ ☐ Months ☐ Years Documents: The Buyer shall be required to produce documentation, as required by the Seller, ...
In California, home sellers are not obligated to accept a full-price offer on their home even if the amount is greater than the full asking price.
While laws vary by state, in general, up until that contract is signed by both parties—even after counteroffers have been sent out—all new offers can be considered and accepted. Once both parties have signed it, however, the seller is pretty much locked into the deal.
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.
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.
A balloon payment is the final amount due on a loan that is structured as a series of small monthly payments followed by a single much larger sum at the end of the loan period. The early payments may be all or almost all payments of interest owed on the loan, with the balloon payment being the principal of the loan.
The buyer may default, delaying payments and putting the seller at risk of not capturing all payments agreed to in the sale. If the buyer defaults on the loan, the seller may need to go through the foreclosure process to reclaim the property.
Closing costs are lower
With owner financing you don't pay origination fees, discount points, escrow deposits, mortgage insurance, or other fees. Closing costs generally amount to three to six percent of the property's purchase price so the savings are significant.
From the buyer's perspective, the interest paid on seller financing may be deductible as business interest, subject to certain limitations and conditions. The buyer should consult with a tax professional to determine the deductibility of interest payments.