“Seller finance” (some of the older folks say “vendor finance”) has been gaining some steam in investment circles. Some of you may have probably heard the term before and wondered what it’s all about. Here are 4 basic things I hope will help you understand the concept of seller financing.
Seller Financing In A Nutshell
In most cases, buyers opt to pay the full price of the house. To get the financing that they need, buyers apply for a bank loan.
In seller finance, rather than the bank providing the loan to the purchaser, it is the seller providing the loan to the buyer. In most cases, the buyer makes some sort of initial down payment, and then pays the rest either weekly or monthly directly to the seller.
If the property still has a loan attached to it, that existing loan can be transferred to the buyer. The remaining capital will be paid to the seller in portions.
This arrangement may be useful if a buyer, for some reason, is unable to get a home loan. From a seller’s perspective, a seller finance agreement could hasten a sale.
How Do You Enter A Seller Finance Agreement?
In seller financing, the buyer writes and signs a promissory note payable to the order of the seller. It contains the terms of the agreement which commonly include the interest rate, the buyer’s monthly repayment schedule, and the potential consequences in case the buyer fails to pay.
Just like in a regular loan, buyers have a monthly obligation to pay the amount agreed upon, but instead of paying the money to the bank, the buyer makes the payments with the seller.
How Long Do Seller Finance Agreements Last?
Seller finance agreements are short term contracts, with the intention of helping the buyers get financing in the end. Some terms start off with a small fee, then the monthly payments usually last up to 5 years, and it concludes with a big, balloon payment.
Many experts claim that sellers are hesitant to enter these agreements, because they need the money right away.
Some investors like Rick Otton, however, say that while most people say they want their money now, many sellers are willing to compromise if it means speeding up the sale process.
What Are The Pros and Cons of Seller Financing?
In this kind of agreement, buyers must look out for the high interest rate with these terms. However, it gives buyers a chance to buy property without paying the normal deposit rate (10%-20%). Sellers, on the hand, can benefit too because it allows them to sell quickly and move on. Of course, it means not being able to collect the full amount.
At the end of the day, it will really boil down to your current situation should you wish to invest using this method.