Is Seller Financing Making a Comeback?

Lately, I have been seeing more listings that are advertising that seller financing is being offered, and I'm also hearing that more buyers are actually taking the sellers up on the offer. When you see the potential benefits to both parties outlined below, you'll not only understand why this is an increasingly popular vehicle for purchasing a home, but you'll wonder why more sellers aren't offering it.

First of all, what is “seller financing”? In its simplest form, and as the name suggests, the seller is stepping in to act as the bank for the buyer to purchase their property. Depending on their financial situation and their need for the cash, the seller may choose to finance the entire purchase, or perhaps only a portion. In either case, there are numerous potential benefits for both the buyer and the seller in these situations.

How it Helps the Seller.

There are several benefits to the seller for offering financing that traditional lending does not. Here are just a few:

• Increases the buyer pool: A common hurdle that prohibits first-time home buyers from achieving their dream of owning a house isn't that they can't afford the mortgage. On the contrary, many couples who both work draw incomes well in excess of what's required to float the mortgage. Where they fall short is in the down payment that the banks require. The typical minimum down payment on a jumbo loan is 20% of the purchase price, and saving up the $500,000 (or more) just to get in the game is a very difficult task for many buyers in this expensive market. When the seller is now the bank, they can alter the terms in any way that they see fit, including lowering or eliminating the down payment requirement entirely. This makes more buyers eligible to purchase their home, which is extremely helpful if the house has been sitting on the market.
• Income for the Seller: With interest rates hovering above 6% for traditional lending, this provides the seller with an excellent avenue to earn a steady income stream from the interest on the financing that they are offering to the buyer. If the risk profile of the buyer is higher than normal, the seller can justify charging a rate even higher than what the financial institutions are offering.
• Potential Tax Benefits: The sellers *may* be able to spread their capital gains tax liability over a longer period rather than having to resolve the tax bill the year after the sale, but you should consult your CPA or tax expert to understand any tax benefits.
• Cleaner Transaction: When the bank is removed from the equation, it enables the transaction to move much more quickly. There's no need to wait for an appraisal, underwriting approval, or even any processing fees. This benefits both the buyer and the seller.

How it Helps the Buyer.

Buyers who take advantage of seller financing reap numerous benefits, too, some of which are very similar to the ones outlined above for the seller:

• In The Game: Quite simply, seller financing is the ONLY option for some home buyers to participate in this market, especially those who don't have nearly the down payment required to get pre-approved by a traditional lender. Just as it increases the buyer pool for the seller, it provides a lifeline for buyers who may not otherwise qualify.
• Lower Fees: By sidestepping a traditional lender, the buyer shouldn't have to pay for loan origination fees or appraisal costs, saving them thousands of dollars.
• Payment Flexibility: Buyers can work with the seller to determine what kind of payment plan works best for both parties, and what the duration of the loan will be. There are countless options available — interest only, fully amortized, or a combination of both. Typically, the traditional lenders only have a few options that buyers must adhere to.
• Quicker, Cleaner Close. Just as it benefits the seller, having fewer costs and hurdles to navigate means the deal can close more quickly, and the buyer can get into their new home sooner.

Any Downsides?

Like anything in life, there are downsides to go with the upsides, and it's no different with seller financing.

For sellers, there's always the risk of the buyer defaulting on the note. This means that the seller (not the bank) is responsible for the cost and effort of a foreclosure proceeding. That's why it's a good idea for the seller to enlist a loan servicing company — they collect and record the payments, and can assist in situations where the buyer is falling delinquent on payments.

The other consideration for sellers is that they're not getting access to all of the proceeds of the sale, so this type of financing doesn't work if the seller needs the cash from the sale of the property for another purpose — buying a new home, paying off an existing mortgage, etc.

For buyers, it's important to know that the term of a seller-financed loan is usually shorter than a traditional loan. This means the buyer will have to arrange alternative financing at the end of the seller-financed loan in order to satisfy the remainder of the obligation. In other words, a balloon payment is commonly due at the end of the term, and buyers need to plan in advance for how they are going to pay for that.

Get the Right Help.

If there's nothing else that you take away from this article, it's this: Make sure to enlist the help of professionals. As simple as seller financing may seem on the surface, it's critical that you discuss the tax ramifications with your CPA, and also enlist the help of a qualified real estate attorney to draft the terms of the loan and to create the promissory note. The more time and effort you put into this phase, the less likely you'll have problems down the road.