What is seller financing

What is seller financing

Seller financing is the act in which a property seller invests or finances the buying of property directly with the entity or person seeking and finding means to buy the property. This type of financing looks into how a buyer creates the payment for a property to the buyer or borrower. The buyer buys the property on behalf of the buyer for the purpose of reselling it to him later when he has the money.

READ: How long can you finance a boat

This seller financing can be disadvantageous as the property might have lost his value before selling it out and can be advantageous if he is able to rent it or sell it out quickly and make extra profit. This transaction is always benefiting both the buyer and the seller as the cost of bank intermediary is eliminated. Seller financing can also be referred to as owner financing.

What is seller financing

Seller financing Breakdown

To structure the purchase of a particular real estate property, owner financing is sure a one way. As earlier stated, it can be advantageous to both the buyer and the seller as there is no cost of intermediary which is supposed to be with banks. In the advertising of property, the seller makes it clear and disclose if the property is owner financing.

Buyer advantages in seller financing

The buyer as the advantages of the seller bearing the risk of buying and payment of the property himself in seller financing. The terms of financing are usually much more negotiable. The buyer may work with any real agent and can also deal with the seller directly for negotiations on the payment structure and the cost of seller financing. In owner financing, the buyer make payment to sellers directly and saves on points and closing cost.

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The seller advantages in seller financing

Since the seller takes the default risk of the property on behalf of the buyer, he can easily increase the down payment than a lender of any property or mortgage lenders would. A mortgage lender can charge a down payment of 9% while the seller takes a charge of down payment of 18% since he is taking the risk on behalf of the buyer. The seller creates the payment for the property and in return the buyer buys the goods at higher rate. The seller generate profit greater than the original value of the property.

Some tips in seller financing

In owner financing, the seller should always consider many factors before buying property and selling of property. It is known that in owner financing, there is no lending of property but sale of property which might make it a little difficult to generate the profit that should be made on the property.

  • Consider the risk factor. It is very important to consider the risk factor in engaging in owner financing. Before buying any property on behalf of seller to be sold to the buyer later, if the risk is very high or low. Liabilities property like vehicle that wear out and loses its value very quickly, the durability need to be considered for the lower the durability, the higher the liability and the higher the risk. An example is when a seller buys a vehicle worth $450,000 and decided to sell it to a buyer who has not more than $380,000 with him. If the durability of the vehicle is very low and loses its value to $350,000 in a month before the buyer could get money; certainly the buyer would want to buy the vehicle at the rate of $350,000 leaving the seller with loss.
  • Consider the capital at hand. Owner financing varies with different capital depending on the property to be bought and sold out. Make sure the capital at hand is able to buy a very good durable property which can earn extra profit in no time

READ: How to finance a pool

  • Get assets not liabilities. Getting an assets like land makes it very easier for income generation unlike liabilities like cars. If you have a land to be bought at the rate of $567,000 and also a vehicle of $500,000 but you have amount of money that is up to $580,000, it would be better to buy land rather than buying vehicle which at the end would give you the $67,000 on the land money, whereas land as an assets can earn you multiple of two folds of the money use to buy the land which is the capital.
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Harish Yadav

Finance and market analyst and chief writer on howtofinance. Passionate to read books and articles on marketing and accounting. Also edits other articles and publish them here.

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