We are here to share some insights and details about how seller financing works, the risks involved, and the ways that it can work for you!
The main benefit to seller financing is that the agreement is almost entirely up to the parties – the seller and buyer. Banks and credit unions aren’t involved in the decision making or the planning. Here are 3 specific break downs for seller financing, and how it works:
Seller Financing: Creative Real Estate Agreements
Seller financing is when the seller agrees to finance the deal for the buyer. This is different than a rent to own agreement. Unlike the rent to own agreement, seller financing deals involve specific long-term plans, but has almost complete freedom in the requirements. The seller acts as the bank, requiring a monthly payment for the property. However, the buyer technically owns the property, once the agreement is signed. There are a variety of perks with this type of deal. Here are a few:
1. Minimal down-payment
Any other form of financing would require a percentage of the cost as a down payment. If the buyer can’t pay a large down payment, seller financing allows them to buy a house they otherwise couldn’t afford. The down-payment still does what it needs to do – it gives the seller some money upfront, and it ensures the agreement between the two parties.
2. Customizable monthly payments
Based on the down-payment, the buyer and seller can come to their own terms on the monthly payment. Since the seller is acting as the bank, the mortgage can be on terms the buyer and seller are okay with.
3. Purchase doesn’t affect your credit score
Whether the buyer plans to live in this house for decades or not, this deal will not affect later deals. Since there isn’t a bank involved in this process, the buyer and seller won’t be affected by it. So, as long as the deal goes okay, future purchases will not be based on this deal.
4. Flexibility in the purchase timeline
Since the bank is not involved, the buyer and seller have the freedom to create a full plan. There are some technicalities that will take time, but overall, the two parties can determine the sale and move-in dates.
5. Available options that banks can’t offer
Overall, if the buyer and seller can find common terms, the deal can be as unique and creative as the two want. The bank has a lot of formalities to abide by, that individual sellers and buyers don’t have to even consider. This can even include land contracts, lease-options, and long-term financing.
Land Contract: Why and How this Contract Works for Both Parties
This type of deal involves only the two parties, guaranteeing that fees and money won’t go to a realtor, loan officer, etc. A land contract is this agreement between the buyer and seller. The contract states that the owner is selling the home to the seller, and is acting as the bank – i.e. receiving payments towards a mortgage. The other detail states that the deed and title stay in the hands of the owner until the mortgage is paid off. This statement is a safety net for the seller, in case the buyer is unable to fulfill the payment requirements.
· A Land Contract’s Effect on the Seller
This is typically where the risk comes into play for seller financing. If for some reason the buyer is unable to make payment, this could cause foreclosure for both the seller and the buyer. Typically, this doesn’t happen. Unfortunately, there is more risk involved for the seller in this situation than the buyer. A foreclosure is the only way a seller financing agreement could affect credit scores. If you are the seller, make sure you have everything in writing and are secure enough in your own finances to handle any unexpected disruptions.
· A Land Contract’s Effect on the Buyer
The seller financing plan is extremely beneficial for a buyer, especially if the buyer has been turned away by the banks. The buyer gets to act as the homeowner, while making reasonable payments for years. As long as the seller works well with the buyer, the buyer shouldn’t have any issues. If you are the buyer and interested in upgrading the property, or making minor changes to the property, make sure it’s in the agreement. As a buyer, you don’t technically own the house enough to make changes without approval of the seller.
Lease-Option: How it Compares to Seller Financing
Most of us have heard of a lease-option. The lease-option looks similar to seller financing, but actually affects the buyer and seller differently. The lease-option makes the seller a landlord, and the potential buyer a renter. This is because the lease-option gives the tenant the option to buy the house at the end of the agreement, but is not part of the initial agreement. There are of course pros and cons to this option as well, so let’s compare the lease-option to seller financing:
· How does this affect the seller?
When leasing to sell, the seller still technically owns the property. This means, the seller is still paying the taxes and other expenses for the property. So, the seller is spending more money on this property. However, it is a safer agreement in terms of long-term. If you are the seller, and the potential buyer can’t make payments at some point, you are able to evict the tenant versus facing foreclosure.
· How does this work for the potential buyer?
The tenant is a potential buyer, who can still change his or her mind. There is more freedom and less commitment for the potential buyer in a lease-option. However, the set up does feel a lot like you’re still just paying rent, and not owning the property.
The final verdict for your options with seller financing is specific to what you’re looking for. There are of course pros and cons to both sides. By assessing your short and long term goals, you should be able to come to a decision and agreement. Regardless, you will see more money in your own pocket when not using a bank.