Seller or Owner Financing Explained: an Alternative Financing Option
The Land Up Learning Series
If you are new to the Central Texas real estate scene, the term ‘seller financed’ (also called ‘owner financed’) may be something you’ve heard and didn’t fully understand but it’s actually a simple concept.
Not only is it less complex than it sounds, but it can also be a very useful financing option, especially for those who may not qualify for traditional bank loans. Let’s dig in:
Looking for an alternative to a traditional bank loan to buy a property? We’ll help you explore the world of ‘seller financing’.
What is Seller Financing?
Seller financing is essentially when the seller of a property takes the place of the bank and finances the property for the buyer. The buyer will sign a contract directly with the seller to pay for the property on a monthly basis with interest for a set amount of time. This financing option can be used to purchase any type of commercial real estate, from residential to raw land.
These contracts, often called ‘notes’, can vary in length just like a traditional bank loan, but 30 years is still a pretty typical repayment term. What is atypical is the amount of interest that is associated with this type of financing. Since each seller financer can set their own rates, they can vary drastically, and it isn’t unusual to see an interest rate of 12-15%. This means overall, buyers end up paying more over the same period with this non-traditional mortgage financing.
What are the Advantages of Seller Financing?
So why would a buyer pay more with this option? The short answer; there are far less hoops to jump through to be approved. Since the seller is acting as the lender, they can decide very quickly on whether or not to approve the financing. Traditional mortgages require lengthy verifications of items like credit history and income and must follow very strict governmental guidelines, whereas with seller financing the seller typically does far less verification.
The financial crisis of 2008 caused a lot of changes to the way mortgage companies lend money. Financial institutions now lean heavily on a borrower’s credit history in order to qualify them for a loan, but if a person has poor credit (or no credit) it can be almost impossible to get a mortgage through the traditional routes. For those buyers, seller financing is an appealing option that can help them obtain their goal of having their own property.
Seller financing also allows buyers to ‘close’ more quickly on their property. The closing process with a traditional mortgage typically takes at least one month (and often longer) due to all the verifications, paperwork, and having multiple parties involved; but finalizing a deal with seller financing can take as little as a couple of days to a week.
Is it Worth it to Purchase Directly with a Seller?
The short answer, as with most things in life, is it depends. Seller financing is typically faster and more easily obtainable than a traditional mortgage but it also costs more in the long term. As with any big purchase though, it’s best to have all the information available to help you make the right decision that is best for you.
If seller financing is something that might be right for you, give our Client Success Manager a call at 512-856-6653 to discuss our inventory of owner-financed properties or check out our listings on our website.
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