Sometimes you find that great property you just have to have, but run into a snag. Maybe it is that the bank refuses to make the loan, or the loan rate is too high. Ultimately, you go back to the seller and tell them that the price has to come down. That doesn’t sound good to the seller and you have to walk away. But wait! You heard about this thing called seller financing, where the seller acts like the bank. Maybe that would work! Wouldn’t it have been nice if you had learned about this before getting this far?
- Seller Financing is sometimes called contract for deed, but these aren’t the same things. Seller financing is sometimes called ‘seller carry’, which is the same thing. The agreement that sets this up is called a contract for deed (sometimes called land contract).
- The seller retains the title. The contract will state that the title is deeded over to the buyer after the terms are satisfied, usually a certain number of payments. Both seller and buyer need to carefully review these terms and what happens if payments are missed. Will the seller be able to cancel the contract, keep the property, and all payments made so far if the buyer is late on one payment? Or is there some other strategy set up for missed payments?
- Seller financing is not ‘all or nothing’. In fact, usually the seller will finance part of the deal and the bank will come in for the rest. Seller financing is a good bargaining chip to have for a buyer who wants the price to come down but the seller is not willing to budge. Perhaps the seller would be willing to finance $100,000 of that $500,000 property, allowing the buyer to come in with zero money down, having the bank finance the other $400,000.
- Terms can be negotiated. Sellers almost always prefer bank financing because they get the deal done right away and have no later hassles with collecting payments and they get a big chunk of money now. Usually, there has to be some distress. High interest rates might give that stress, as they cause the prices to be depressed. A seller who wants top dollar might be willing to ‘carry’ some of the loan to get it done. The buyer benefits by having less money down. Usually the terms of the seller financing are better than the bank’s. The rate might be as low as 0%, but the term will usually be 5 years or less. But they can be whatever the seller and buyer agree upon.
- An attorney is necessary. Definitely you want to get an attorney involved to write the contract. You should be the one with the attorney whenever possible. You want to be the side writing the contract. Yes, there is a cost. Factor that in. The terms are usually more favorable for the side that’s writing the contract. Don’t believe me? Look at all the terms you agree to every time you install a new piece of software or sign up for a new cell phone. You have no idea.
Remember, in a seller’s market, seller financing will be next to impossible to do. There needs to be some stress on the seller to agree to this. As a buyer, you want to look for that pain point and tailor your seller financing offer to ease that pain. As a way to quickly sell your property or to reduce taxes as you’ll be spreading out the gains over multiple years. Next time you make an offer, consider a traditional offer and one with seller financing with a higher purchase price (but lower down payment). People love having a choice and this might just get the deal done for you.
