Imagine you are just about to buy a real estate property but find yourself in the difficult situation of falling short of the required funds. You are so close but yet so far. Don’t loose heart, seller financing can come to your rescue. Under the seller financing arrangement, the seller of the property provides a loan to the buyer in order to enable him close the sale transaction. The amount of loan provided by the seller would depend upon the need of the buyer. The other names of seller financing include owner financing or purchase-money mortgage. The loan provided by the seller could be as much as the buyer needs but under the normal situations it supplements the home loan availed by the buyer. The aim of seller financing is simple, enable an early closure of the deal so that both the buyer and seller can reap the benefits. In return for the benefits related to seller financing, the buyer and seller are exposed to a few risks related to this financial arrangement. Let us first look at the benefits of an owner financing deal enjoyed by the buyer:
o Enables the buyer and the seller to keep the closing costs under check.
o The buyer has a recourse to a convenient and hassle free method of financing to conclude the deal.
o The buyer of the property may avoid spending on PMI insurance premiums.
o The buyer may seek additional loan from the seller towards furniture, fixtures and accessories contained in the house at the time of purchase. At the same time, seller may also be more than willing to this arrangement.
On the other hand, the advantages enjoyed by the seller include:
o The interest rate charged by the seller on the loan made available to the buyer is at a premium to conventional loans
o The seller usually ends up receiving a premium over the market price of his property.
o The seller does not have to undertake the exercise of home improvement or repairs for the property that he intends to sell.
As far as the shortcomings are concerned, these are as under:
o The seller may not disclose the other encumbrance charged against the property. In such a scenario, the buyer of the property would not have a clear title to the property even after repaying the loan to the seller.
o Higher Foreclosure risk is attached to properties financed by way of seller financing transaction because of higher interest cost and incomplete credit appraisal by the buyer.
o Under a seller financing option, it is very usual for the buyer to be paying a higher price for the property compared to the market price because the buyer usually does not engage the services of a home inspection agency to assess the fair value of the property.
A Seller financing transaction can be a win-win situation for both the buyer as well as the seller but like all financial transactions, both the parties have to do their due diligence before signing on the dotted line.