Traditionally, conventional real estate transactions are handled through a mortgage lender, in which the bank finances the purchase.
One option that may be available for some buyers, though, is seller financing. Seller financing is when the seller of the property finances the purchase for the buyer. A seller-financed transaction can be quicker and cheaper than conventional purchases.
During the sale, a bank isn’t involved in the process. Instead, the buyer and seller make up the promissory note, setting the interest rate, schedule of payments and more. When creating the note, both parties should hire professionals to help with the creation of the contract and promissory note, as well as to provide additional guidance in the process.
Before starting down the path of a seller financed property transaction, a buyer first needs to confirm the seller is free to finance. This often means that they have no current mortgage, or their mortgage lender will allow it. Buyers should be prepared to make a down payment on the property, as well.
The advantage of seller financing is the ability to allow a transaction to happen in cases where a mortgage may be harder to get. Sellers can often sell a property faster as well, often without having to make costly repairs lenders would normally require.
Additionally, the property transaction has a lower closing cost without a bank participating, due to the lack of fees and other charges normally added on during the financing process.
It is worth noting that seller financing often comes with shorter terms, such as five years, with a balloon payment at the end of the payment period. This is often done in hopes that the buyer will refinance the payment with a traditional lender later on once they have acquired equity in the home.
Kevin Romney is the co-founder and managing director of Camino Verde Group, a Las Vegas real estate investment and development firm. He currently leads the company’s efforts in the acquisition and disposition of multifamily assets in California, Nevada, Kentucky, Texas, South Carolina and Utah.