What is Seller Financing or Owner Financing
What is seller financing? Seller financing is the same as owner financing. In this video, I’m going to talk about what seller financing is when one would use seller financing, and what the advantage of using seller financing is. So how does seller financing work? Well, in traditional lending, the bank actually gives money to the buyer to get the loan, whereas in seller financing, the seller extends credit to the buyer to buy his house with a certain amount of a down payment and certain terms and conditions.
The best way to explain seller financing is by giving you an example. So let’s assume there is a seller who wants to sell his house for a million dollars. The house is a little bit overpriced, but the seller will not go below that price. That’s what he wants. And let’s assume that he found a buyer and that the buyer is willing to pay the higher price for the house, even though he could find something similar in the 950 range or the 925 range. But let’s assume the buyer is willing to pay a million dollars, which is typically the case when the buyer cannot get a loan from a traditional bank. The second option is seller financing. And when the seller does the financing, the buyer usually pays more for the house or may pay more for the interest rate. So in this example, let’s assume the buyer cannot get a loan from the bank. So the seller is financing it, and he’s willing to pay a million dollars for the house, assuming he puts 10% to 30% down. So in this example, if the house is worth $1 million and let’s say the buyer is putting 20% down, that means the balance is $800,000. The seller will carry a note for the buyer, and then the title goes to the buyer. Or it could be kept in the seller’s name. It’s a negotiable item. And then the buyer pays the seller the monthly amount. Usually, in this kind of scenario on seller financing, there is not a 30-year note, although the payments will be done on a 30-year amortized or 20-year amortized mortgage. Usually, these loans, which the seller carries notes for or seller finances, are refinanced in three to five to seven years, depending on how you negotiate.
But a seller does not want to carry the note for 30 years or 20 years. You have to put a stipulation in the note or in the terms and conditions that the buyer will refinance in three to five years, which is pretty typical. I just did a note or seller carry financing a few months back on a commercial property where the seller wanted a higher price. It was one million dollars. The property was worth about 950 to 1 million dollars. But the buyer was willing to pay $1.2 because he could see the development potential in the future. So he was willing to pay more. But because of the higher price and because he did not appraise, the buyer could not get a loan from the bank. So the seller ended up carrying the note for five years. And there was a stipulation in there that within three to five years the buyer will refinance and pay off the balance of the note. So that’s another example. So the question is, why would the buyer go with seller financing?
Well, there are a lot of reasons. One of the typical reasons is that he cannot get a traditional loan from the lender or the bank. An example would be, let’s say there’s a buyer who has medical issues and a lot of bills, which shows up on his debt ratio, and he cannot get a house, but he really wants to buy a house. And maybe he finds a seller who knows the buyer, finds out who the buyer is, and understands the situation—that he had student debt, he had filed for bankruptcy, he had medical bills, or whatever the reason—and maybe he sells the business at a loss. So whatever the reason, he has a lot of cash flow but poor credit. So the banks would not give him a loan. So in this case, the seller understands the buyer’s situation. So he will usually charge him more for the property. He will charge him more on the interest rates, and the buyer understands that, hey, the buyer is not going to get a loan from a traditional bank or lender. So he’s willing to pay a higher price on the purchase price of the property and a higher price on the interest rate. At least he’s buying a house because he or she wants to buy the house. So there are a lot of other scenarios. But basically, seller financing is here to stay. When the prices go up and the interest rate goes up, inflation is high, as it is right now in November 2022. It is very typical that seller financing will be coming back. I just did seller financing on a commercial property six months ago, and I have an escrow right now as we speak on another commercial property where the buyer could not get the loan because he did not appraise. The buyer really wants to buy the commercial property, and the seller has agreed to do seller financing because he’s getting a higher price and will charge the buyer 8%.