Seller Financing: Is It a Good Idea?

When it comes to buying and selling real estate, seller financing is a great option for the buyer who can’t secure financing or is having trouble finding a buyer. In seller financing, both parties enter into an agreement which cuts out the middlemen of banks and mortgage lenders. In this case, the seller becomes the lender, and instead of giving a loan in the form of money as banks and mortgages do, they take payments from the buyer. Seller financing requires both the seller and the buyer to sign a promissory note containing the details of the interest rate, repayment schedule, and consequences of default. While the idea of seller financing does make sense, is it the smartest choice? When it comes to participating in seller financing, there are various pros and cons to consider.

Pros for the Seller

In a possible scenario for the seller, they may have paid off their home, and no longer want to pay property taxes along with insurance and maintenance. Perhaps they’ve had their home on the market for some time, and are tired of waiting. Because they are in a hurry, it seems that becoming the financier is the best alternative. By being the seller financier, they can gain a buyer who (as stated above) can’t or doesn’t want to deal with the banks or mortgages.

Pros for the Buyer 

Seller financing is a great option for the buyer because the closing process is faster and there are no closing costs. The buyer could also be taking this approach because they have credit problems or they are self-employed without adequate proof of how much they make. The good news is, even though the bank or traditional lenders turned them down, the seller can give them the okay to move forward. The buyer and seller can also agree on the down payment so there aren’t any surprises.

Cons for the Seller

If the seller is not yet free of their mortgage, they have to get approval from their lender before they can continue. The buyer could also quit making payments and just walk away. However, if the buyer doesn’t walk away, the seller has to go through a foreclosure process, resulting in spending a lot of time and money on fees. Also, if the buyer wasn’t taking care of the property, this could add to the cost of repairs of the home.

Cons for the Buyer

The buyer needs to be aware that the seller can run a credit check on them and are allowed to turn them down. If they do get approved, the buyer needs to realize that the seller may charge them higher interest rates than a bank would. The sellers also have a right to evict the buyers within 30 to 60 days depending on if they miss even one payment. The seller might sell the promissory note having the buyer deal with someone else (this happens with traditional mortgages as well). The buyer also needs to know if the seller still has a mortgage on the home. Having a mortgage can cause risks to the buyer; where if the seller has financial problems, the buyer can still lose the home.

What is the consensus?

It all depends on the unique situations of both the buyer and the seller to determine if this is indeed a good approach. It seems more likely that seller financing is done out of desperation than just a simple choice. It is also advised to get professional help in this type of process. Both the buyer and the seller should have someone experienced and qualified in these matters, like a real estate agent or even an attorney.

Would you ever consider seller financing? Tell us in the comments below!