By Steve Seller Financing has been used in real estate and other transactions for thousands of years and still possesses the dual capacity to provide unique investment opportunities with equally unique risks for all parties. This Article is intended to identify the pro’s and con’s of Seller Finance.
What’s Great About Seller Financing
1. No Lender Required – When institutional lenders tighten-up credit and loans become harder to get, Sellers with equity in their property can get their property sold by providing some or all of the purchase financing, also called “carrying back paper”.
2. Better Pricing – Unlike institutional lenders that must package sales commissions and other funding costs into the financing, Seller Financing generally avoids these added costs and can offer lower cost financing for which Buyers will pay more.
3. Better Return on Investment – When a Seller carries back financing, they are acting in the place of an institutional lender by converting the cash that they would normally receive in sale proceeds (liquid assets) and converting it into a secured cash stream (hard assets). Cash in a bank today is earning less than 1% interest. Interest on loans is typically earning from 3-6%.
4. Security – Seller Financing is generally secured by the real estate. If the Buyer/Borrower doesn’t pay, the Seller can foreclose and either get paid or take the property back to rent or resell.
What’s Not So Great with Seller Financing
1. Seller is the Lender – Normal loans are hard to get because lenders examine credit, and jobs, and income stability, and financial capacity. Seller financiers often lack the sophistication and access to provide the same level of “due diligence” as to the borrower’s credit-worthiness. So Seller Financing may carry a higher risk of default.
2. Loss of other investment opportunities – Because a Seller’s sale proceeds are being loaned to the Borrower, those funds are not available to the Seller to make other investments which may be more lucrative.
3. Income is at risk – If the Borrower defaults in repaying the Seller Financing, the Seller’s income stream is cut-off and will stay cut-off until the Seller either forecloses or reaches some other agreement with the borrower. Foreclosure could take more than a year. Buyers sometimes seek to avoid paying Seller Finance by claiming that the Seller failed to disclose some defect that has …read more
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