Most of us have bought and sold real estate or land but in the traditional way of securing a loan or mortgage from a bank to make the purchase. Sometimes conventional options aren’t available. Fortunately, there is another way (many ways, actually); sellers can finance the sale and allow buyers the ability to make direct payments to the seller.
So what is a seller financed sale? The buyer and seller create the terms of the transaction themselves. They devise the promissory note which clearly outlines the monetary obligation and the payment schedule. The two parties are the only individuals/organizations involved in the purchase.
As with anything, there are some enticing advantages to this type of financing for both the buyer and the seller, but also, there are some drawbacks that one needs to be fully aware of as well.
Increase number of buyers
Advantage
By offering and advertising seller financing, a seller can increase the size of their buyer pool.
Disadvantage
Seller financing has a different set of rules that need to be learned by both the buyer and the seller. If you are entertaining providing financing for a buyer or using or purchasing real estate through seller financing, it is important to understand the rules and consult experts to make sure it is right for you. Likewise, there are tax implications that may apply to both parties, so it is important to consult your tax person as well.
Cost
Advantage
When the seller finances the land or real estate sale, he/she doesn’t have to mark up for closing costs or other costs that are often associated with buying and selling real estate. Because the seller is the lender, there won’t be a demand to make costly repairs on anything that might be required by a traditional lender. Closing costs will be less which is advantageous to all parties. Likewise, the seller and buyer can save money because they get to create the terms of the loan that works for both parties including the down payment and interest rate, and avoid costs like origination fees and processing fees.
Disadvantage
Although closing costs may be minimized, both parties will need to hire qualified individuals to look at all paperwork and ensure that it is drawn up correctly and doesn’t have any loopholes that could cost either party. In a seller financed agreement, often the financing is short-term (5 years is common) which can be financially taxing for the buyer. A balloon payment is often due at the end of five years which often forces a buyer to get a traditional loan to refinance which can defeat the purpose of going through a speedy seller financed loan.
Speed
Advantage
Another advantage of seller financing is that real estate transactions can move much more quickly than traditional methods of financing. There are fewer hold-ups because, of course, the buyer doesn’t have to go through a rigorous approval process and investigation into their financial history.
Disadvantage
Of course, the advantage of a quick approval process can also be a disadvantage to the seller. The reason for the thorough background check into one’s financial history is that it secures the loan, and the seller is sure to receive the money that was promised. Likewise, there is the misconception that because the deal circumvents a middle-man (the mortgage company), that the seller will ask for less for the property. This often is not the case. In fact, the seller may ask for more because they are taking a greater risk. But, the buyer is at risk, too. The seller may not own the property outright, and that can cause some major complications. It’s a good idea for the buyer to make sure that the property is as described and owned outright by doing their due diligence and completing a title search to determine if the property has any tax liens or additional mortgages.
Less paperwork
Advantage
Using seller financing for a land contract or real estate purchase means less paperwork and complex contracts that cost money and extend the time frame of completing the deal.
Disadvantage
Much of the paperwork that is involved in a land contract or real estate transaction protects the buyers and sellers against unlikely but potential problems and unforeseen situations. On the other hand, when you close on a traditional real estate transaction, the buyer receives an important piece of paperwork–the title to the property. In a seller financed land contract or home sale, the seller retains the title of the property until the buyer has made their last payment. This can be especially scary for the buyer when you have made a number of payments, but because of an unforeseen circumstance, you can’t pay one month. It can leave you feeling like you are paying for something without the security of knowing it is yours.
As will all things, there are some good and some bad. With seller financed real estate that is definitely true. The bottom line is you (as a buyer or seller) shouldn’t go this route without expert help. Both sellers and buyers need to have a real estate agent, to minimally, review and help with the contract and the promissory note. It is a good idea to find an agent who has experience with seller financed real estate transactions and knowledge of statewide policies towards those kinds of purchases.
At 616 Realty, we’d be happy to help you navigate this process and determine if it is right for you. Contact us, and let us share our many years of collective experiences with both traditional mortgages and seller financed transactions to help you safely sell and buy real estate.