Purchasing a property for all-cash is rare. Not many people have hundreds of thousands of dollars lying around. The common folks have to rely on an economic function known as “financing,” which is essentially just a fancy term for “borrowing.”
In the world of real estate, the money borrowed to purchase a property is known as a mortgage. Those who can meet certain qualification requirements may receive a mortgage from a traditional financial institution, such as a bank. Others who do not have a good credit score or a significant yearly income may find it harder to obtain such a loan, and in the rare case that they do, it will be at the expense of less favorable terms, such as a higher-than-average interest rate.
An alternative form of financing a property that can be quite beneficial to the latter category of individuals is seller financing. Seller financing takes place when the owner of the property decides to take on the role of the lender, essentially replacing the financial institution. The owner agrees to receive monthly payments for a specified amount of time instead of a one-time, lump-sum payment.
For example, let’s assume the seller and the buyer agree on the final price of $100,000. Instead of paying the seller $100,000 all at once, the buyer will make monthly payments of $1,000 toward the loan value, plus an interest payment. The latter amount will be determined by the interest rate agreed upon by the two parties when the deal was officially closed.
As far as buyers are concerned, the benefits associated with seller financing are numerous. For starters, no income threshold or credit check are required. All of the loan’s terms are negotiable, which leads to another potential benefit—the possibility of obtaining a property’s ownership with a zero down payment, a very powerful tool for those who are just getting started in real estate investing, those investors who have experienced financial troubles, or for homebuyers who simply do not have the savings to make a down payment but can afford the monthly payments.
Now, you may be wondering, “What’s in it for sellers? Why would anyone rather receive monthly installments for decades then a one-time payment of hundreds of thousands of dollars?” Well, the fact of the matter is that not everyone thinks along the same lines or has the same financial goals.
A retiree who has quite a significant amount in his savings account will probably not be in a rush to cash out. Instead, this individual might prefer monthly payments, which can support his personal living expenses.
But that’s not all. Sellers who are interested in providing seller financing can also benefit from the overall price of the agreement. In order to entice sellers to accept financing terms that are favorable to them, or in order to entice sellers to provide financing at all, buyers will usually crank up the offering price by a significant amount, and that’s not to mention the additional revenue that the seller will generate through interest payments.
Whether you are an aspiring investor, a seasoned investor or a homebuyer searching for the perfect place to live—whatever your reasons for purchasing a property—seller financing is one of the most powerful tools for those who prefer low interest rates, low or no down payments and virtually no qualification requirements.
This does not mean that seller financing is easy to obtain; not all sellers are willing to take on the role of a lender. However, there are benefits to be had for both parties, so chances are that every buyer will eventually encounter a seller who will embrace the idea.
This article by Abhi Golhar originally appeared in Private Lender magazine: November/December 2016