Strategies

We have grown accustomed to borrowing money from a bank to purchase a property and then paying the bank back via a "mortgage."  With seller financing, the seller finances the "loan" to the buyer, who pays the seller as if the seller was the bank.

Let's say Ms. Seller owns her property out right and wants to sell it for $200,000. Let's say Mr. Buyer wants to buy the property and offers her $210,000 if she will finance it to him at 5% amortized over 30 years, with a balloon payment no later than 5 years after closing.

How does this benefit Mr. Buyer?  Mr. Buyer can get a lower interest rate from Ms. Seller than he can from a traditional bank.  And traditional underwriting that takes so long is avoided.

How does this benefit Ms. Seller?  Ms. Seller can collect nearly all interest (as this is amortized over 30 years and most of the payment is going toward interest, just like a traditional mortgage), and still get paid out in full within 5 years.  She will receive just over $1,000 a month for up to 60 months, totalling $60,000 and still be owed nearly $185,000 at the end of the term. This nets her around $45,000.  Oh, and not to mention the extra $10,000 Mr. Buyer paid over the asking price.

How does Ms. Seller ensure Mr. Buyer is going to pay her monthly? Is he just going to shake her hand and agree to pay her a monthly payment? Not at all.  A loan servicing company is used to set up and make payments. Title companies are used; deeds are used; proper documentation is a must. If Mr. Buyer misses a payment, depending on the terms of the contract, Ms. Seller can take back the property.

So many pieces of this are negotiable; the purchase price, the interest rate, a down payment, the length of the term, the length of amortization, etc.  This is not something to take on lightly, but it is very much an underutilized strategy for buying and selling a property.