All About Seller Carry Financing
You’ve heard of creative financing and want to know more, especially given current interest rates.
Let’s break down one form of creative financing: seller carry.
Seller carry financing, also known as owner financing or seller carryback, is a real estate transaction where the seller of a property acts as the lender and provides financing to the buyer.
So, instead of the buyer obtaining a mortgage from a traditional financial institution, the buyer makes payments directly to the seller.
Who can offer seller carry financing?
Sellers who own their house outright or who can pay off their entire mortgage with the buyer’s down payment.
How does seller financing work?
There are 7 important aspects to understand about seller financing:
Purchase Agreement: The buyer and seller negotiate the terms of the sale, including:
purchase price
interest rate
repayment period
any other relevant terms
Both parties must agree on these terms and document them in a legally binding purchase agreement.
Down Payment: The buyer typically makes a down payment to the seller, which is a percentage of the purchase price. The down payment amount is negotiable and could be lower than what a traditional lender would require.
Promissory Note: Escrow creates a promissory note, which is a legal document outlining the terms of the loan. It includes the loan amount, interest rate, repayment schedule, and any other agreed-upon conditions.
Mortgage or Deed of Trust: To secure the loan, the seller may request a mortgage or a deed of trust on the property. This allows the seller to take back the property if the buyer defaults on the loan.
Monthly Payments: The buyer makes regular monthly payments directly to the seller, or to a note collection company identified in the sale agreement. The payments are principal + interest or interest-only, based on the agreed-upon terms. The payment schedule and duration of the loan are specified in the promissory note.
Term: The term of an owner carry financing deal can vary greatly, however typical terms require a balloon payment after 3-5 years. At that time, the buyer can either pay off the loan completely with cash, or the loan can be refinanced into a conventional loan, or some combination of both.
Closing and Title: The transaction is finalized at a closing, where the necessary documents are signed, and ownership of the property is transferred to the buyer. The seller may retain the title until the loan is fully repaid if you choose to do a land sale contract.
Why would owner carry financing benefit me or the seller?
There are 4 main reasons buyers and sellers choose to use owner carry financing:
Flexibility: Buyers who may not qualify for traditional financing or who prefer to avoid the strict requirements of banks can still purchase a property with owner carry financing. Also, we know that Fanny and Freddie have limits on the number of loans they allow any one person to have, and seller financing is a work around for that. Generally seller-financed loans do not show up on a person’s credit report.
Faster Process: Owner carry financing can be quicker than obtaining a mortgage from a financial institution, as it eliminates some of the typical lender requirements, processes, and fees.
Negotiable Terms: Buyers and sellers have more flexibility to negotiate the terms of the loan, such as the interest rate, down payment, and repayment schedule. Also, closing costs are significantly less since you don’t have to pay for a lender required appraisal, loan origination fees or points.
Taxes: Sellers can potentially earn interest on the loan, providing an additional income stream and potentially reducing their tax burden if they receive payments over time instead of a lump sum.
Okay, all of that sounds great! Why wouldn’t all sellers offer owner financing?
There are a few reasons a seller wouldn’t want to go this route:
Seller has a mortgage on the property. If the seller has a mortgage on the property, they generally cannot offer seller financing unless the buyer’s down payment is enough to pay off the balance of that mortgage.
Seller wants to cash out. A lot of sellers don’t want to deal with collecting payments, they want their money to do other things, invest in other properties, and just want to be done with the deal.
Seller is doing a 1031 exchange. If it’s investment property and the seller wants to exchange into another investment, seller financing generally doesn’t work because a 1031 exchange requires all equity to be carried forward into the replacement property in order to be completely tax deferred. There are nuances to this, and it’s best to speak with a 1031 exchange accommodator for details.
It's important for both parties to consult with legal and financial professionals to ensure that the transaction is structured properly and all legal requirements are met.
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