Seller Financing in Today’s Real Estate Market

What is Seller Financing?

Simply put, seller financing is when the Seller of a property lends the funds for the purchase of the property to the Buyer, rather than the Buyer acquiring the funds through a financial institution. Read this blog for a more detailed explanation of Seller Financing.

Reasons for Seller Financing

There are many reasons why Seller Financing may be considered in a real estate transaction. Some of the most common reasons could include:

• A more favorable interest rate through Seller Financing due to increasing interest rates at financial institutions
• Both parties want a quick transaction and the financial institution’s loan process will take too long
• Buyer wants a short-term note, for example 6 months, and the financial institution requires a longer term
• Buyer has poor credit hindering a loan from a financial institution
• Seller is eager to sell the property and offers Seller Financing to encourage a Buyer who might be otherwise hesitate due to high interest rates

Advantages of Seller Financing

A transaction utilizing Seller Financing can be mutually beneficial to both the Buyer and the Seller of a real estate transaction. One shared benefit of Seller Financing is that the real estate transaction could be completed in a much speedier manner without third party lending.

Some other advantages for the Seller and Buyer include:

Advantages of Seller Financing for the Seller

• Lending the money to the Buyer could allow the Seller to earn more money on their funds than they would by depositing the money into a traditional savings account
• Seller Financing allows the Seller to have more control over the entire real estate transaction. They know the financing is there so some of the question marks, issues, etc. that could arise with third party lending will not be a factor
• Should the Buyer default on the loan, the Seller can foreclose on the loan and potential receive their property back without the need to return any previous payments

Advantages of Buyer Financing for the Buyer

• The Buyer may get a lower interest rate, or other more favorable terms, with the Seller than through a financial institution
• The loan process with the Seller could be much less complicated than the loan process through a financial institution
• Reduced closing costs could be associated with Seller Financing • Seller Financing could allow for a more flexible or lower down payment

Example of Seller Financing

Here is a basic example of how Seller Financing can be mutually beneficial financially for both the Buyer and the Seller of the real estate transaction.

Typical savings account interest rate - 0.5%

Average financial institution loan interest rate – 4%

Loan Amount - $500,000

If the Seller deposited their $500,000 in a savings account at a financial institution, he would earn $2500 in interest over a full year. However, if the Seller offered the Buyer an interest rate of 2% on a loan of $500,000, the Seller would earn $10,000 in interest over a year on the loan. Alternatively, if the Buyer got a loan from a financial institution at 4%, he would pay $20,000 in interest over a year to the financial institution, but he would only be paying $10,000 in interest should he accept Seller Financing at the discounted interest rate of 2%.

There are additional considerations for Seller financing as part of a 1031 exchange. Learn more about them in this blog article.