Seller Financing: What Is It?
(September 2011)

by Enrique (Henry) Saldana

Someone once said, "Don't assume people know what you are talking about all the time." And as I sent out an e-mail with regards to a Seller Financing deal, one of the responses I got simply exemplified that truth.

The response I received from the realtor was, and I quote, "Approximately 10 yrs ago, I sold a property through a bank credit loan and it was very troublesome and it took a long time to close."

Having a seasoned, with over 10 years of real estate experience, local realtor make that kind of comment with regards to seller financing has prompted me to write this article.

So, What Exactly Is Seller Financing?

Seller Financing is a loan provided by the seller of a property, or any type of real property, to a purchaser. Normally, the purchaser will make some sort of down payment to the seller, and then make installment payments (usually on a monthly basis) over a specified time, at an agreed-upon interest rate, until the loan is fully repaid. In layman's terms, this is when the seller in a transaction offers the buyer a loan rather than the buyer obtaining one from a bank.

To a seller this is an investment in which the return is guaranteed. For a buyer it is often beneficial because they may not be able to obtain a loan from a bank. In general the loan is secured by the property being sold. In the event that the buyer defaults the property is repossessed or foreclosed on exactly as it would be by a bank.

There are no universal requirements mandated for seller financing. In order to protect both the buyer's and seller's interests, a legally binding Purchase Agreement should be drawn up with the assistance of an attorney, or a Notary in our case, and then signed by both parties.

Another interesting aspect of a Seller Financing Method is the seller transfers possession and use of the property, in the case of real estate, to the buyer, but retains title until the purchase price plus the interest is paid in full.
This will enable the buyer to purchase real estate that otherwise might be out of his or her reach due to an inability to obtain traditional financing from a mortgage lender (bank).

Some variations of Seller Financing, also known as Owner Financing, include:

Land Contracts
Land contracts do not pass legal title to the buyer, but give the buyer equitable title. The buyer makes payments to the seller for a certain period. Upon final payment or a refinance, the buyer receives the deed.

Promissory Notes and Mortgages
Sellers can carry the mortgage for the entire balance of the purchase price, which may include an underlying loan. This type of financing is called an "all-inclusive mortgage" or "all-inclusive trust deed" (AITD). The seller receives an override of interest on the underlying loan.

A seller may also carry a junior mortgage, in which case the buyer would take title subject to the existing loan or obtain a new first mortgage. The buyer receives a deed and gives the seller a second mortgage for the balance of the purchase price, less the down payment and first mortgage amount.

Lease Purchase Agreements.
Selling on a lease purchase agreement means the seller is giving the buyer equitable title and leasing the property to the buyer. Upon fulfillment of the lease purchase agreement, the buyer receives title and typically obtains a loan to pay the seller. The buyer may, or may not, receive credit for all or part of the rental payments toward the purchase price.

Benefits to the Buyer:
Little or No Qualifying
Even if the seller demands a credit report on the buyer, the seller's interpretation of buyer qualifications is typically less stringent and more flexible than that imposed by conventional lenders.

Tailored Financing
Unlike conventional loans, sellers and buyers can choose from a variety of payment options such as interest only, fixed-rates, or a balloon payment.

Other benefits are:
Down Payment Flexibility
Negotiable Terms
Lower Closing Costs
Faster Possession

Seller/Owner Financing Benefits to the Seller:
Higher Sales Price
Tax Breaks
Monthly Income
Higher Interest Rate
Quicker Sale

Seller/Owner financing attracts a different set of buyers. If a property is not selling under conventional methods, offering seller/owner financing is one way to stand out from the sea of inventory and move a hard-to-sell property that otherwise might not sell.

In closing, before entering into a transaction with owner financing, consult a real estate expert and obtain competent legal advice.

Yes, and by the way, Seller/Owner financing methods and practices could be applied to properties in Mexico.

This report courtesy of Enrique (Henry) Saldana
Mexico Realty Solutions
Tel: (984) 147-2388
Cel: (984) 111-8743


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