Seller Finance is a private transaction between the buyer and seller of a property where the seller extends financing to a buyer without the involvement of a financial institution.
Similar to a traditional mortgage, the seller and buyer agree to terms on the property. The buyer will provide a down payment and make monthly payments to the seller for a certain amount of years. Typically between 5-10 years. At the end of that period, the seller will receive the remaining amount in full, which is also known as a balloon payment.
Conventional Mortgages vs. Seller Finance
| Feature | Conventional Mortgage | Seller Financing |
| Lender | Financial Institution (bank, lender or mortgage company) | Property seller acts as the lender |
| Qualification Requirements | Strict credit score requirements, verified steady income, low debt-to-income ratio, extensive documentation required | Flexible, determined by seller, less stringent credit requirements, more accommodating of non-traditional income, minimal documentation may be acceptable |
| Interest Rates | Based on market rates and borrowers credit profile. Generally lower with good credit. | Determined by both buyer and seller. Generally under market rates or built in 0% interest |
| Term Length | Standard 15, 20 or 30 years | Usually shorter (5-10) years and consists of a balloon payment at the end of the term |
| Closing Costs | Generally 2%-5% of the loan amount. Includes origination fees, points, appraisals, etc. | Generally lower, no mortgage origination fees, fewer third party requirements |
| Closing Timeline | 30-45 days on average | Can close much faster. Sometimes within days. |
| Payment Structure | Fixed monthly payments or adjustable rates. Typically includes escrow for taxes and insurance. | Flexible payment arrangements, may have irregular payment schedules, Buyer often pays taxes and insurance separately. |
| Default Consequences | Formal foreclosure process. Can take months or years. | Varies by arrangement. Land contracts or Deed in Lieu of Foreclosure allow fast repossession without foreclosing, May have less borrower protection. |
| Title Transfer | Buyer receives title at closing. Lender holds lien until loan is paid in full. | Varies by arrangement. May withhold title until loan is fully paid or may transfer title immediately with seller lien. |
| Ability to Sell/Transfer | Seller receives full proceeds at closing. | Seller receives payments over time. Can sell promissory note typically at a discount. |
| Best For | Buyers with strong credit, stable income and traditional employment | Anybody |
Why We Love Seller Finance
We here at Xenia Group actively promote & endorse seller financing transactions. While seller financing isn’t a new practice, it has become more common in the recent years. We actively own and manage tons of properties under seller financing terms and there are plenty of agents, investors & wholesalers who are using creative financing terms to help sellers sell their homes, put retail buyers in homes & giving investors investment properties under terms and conditions that suit everybody.
Interest rates are higher than they have been in 20 years and it has severely hindered the market of potential buyers. While real estate transactions remain up, the avatar of buyer and seller has dwindled to savvy investors, hedge funds and individuals who know nothing outside of the traditional ways.
For far too long banks, lending companies and other financial institutions have had a strong arm on the market and have let their greed and carelessness literally rip people out of a house and home. Far too many individuals in their 20s and 30s view homeownership as a pipe dream. Sad. But it doesn’t have to be this way. It shouldn’t be this way.
Seller financing and other creative forms of real estate transactions are slowly, but surely becoming more mainstream. There’s plenty of real estate agents who have come along to realize and understand that this might be the only viable option for a seller to sell their property and in the process, just opened up a door to a whole new avatar of buyer.
More creative and seller financing transactions means more competition for the banks and lenders. It also means higher appreciation. Interest or future appreciation value going to the seller while the buyer not only has a place to call their own, they too can now live the dream of being a homeowner.
Benefits for Sellers
- Typically, buyers cover your agents commission and closing costs. In the conventional way, these are deducted from your gross proceeds.
- In majority of seller finance transactions, sellers are paid OVER their asking price and value of their home.
- Can increase net profits with a reasonable interest rate. Typically between 1-3%. Not all seller finance transactions have interest rates, but is something that can be mentioned in negotiations.
- Receive the remaining balance in a lump sum at the end of the balloon term. It is a lot easier for a buyer to qualify and receive a loan after building up years of transactional history.
Benefits for Buyers
- Easier path to homeownership
- Lower entry and principal payments
- Building equity and setting the future appreciation for the local market
- Easier to qualify for a loan or re-fi to balloon out the seller
Benefits in General
- Gives banks, lenders & financial institutions competition. Which can help deflate interest rates.
- Helps structure how much the future local market will appreciate by overpaying current value and appraisal.
- Puts more money in the sellers pockets rather than the bank.
- Buyers can start building equity
- Assists in making your local market and economy stronger with fair and reasonable terms while also helping the future appreciation of the market.
Seller finance and creative finance in general is a beautiful thing. It gives power back to both buyers and sellers. It can help stimulate the local economy while adding high appreciation to the market. The traditional way of buying and selling real estate has not gotten any easier, smoother, competitive or fair to buyers or sellers. It has gotten worse year over year and with interest rates higher than they have ever been, it is really starting to show. This isn’t the America our parents, grandparents & great grandparents envisioned for us. While things have rapidly progressed, they have tended to only benefit the far and few in between. We have the power to change that. You have the power to change that. We can cry and complain about it, stay silent and let it continue getting worse or we can make a small change into how we play the market. The more real estate transactions that are creative financed, the better it will be for the present and future of homeownership, appreciation and real estate in general. Be the change you want to see. Don’t wait for that change to happen on its own. If the last 20-30 years have taught us anything, it should have taught us that if we don’t make these slight adjustments now, it will only get harder and worse.