Seller Financing By Owner: What You Should Know

Seller Financing By Owner: What You Should Know

Jul 22, 2019 July 22, 2019

Seller financing, sometimes called owner financing or creative financing, is an option for buyers who may not be eligible for conventional mortgage financing from a financial institution. If you’re considering buying a home with seller financing, or if you are selling a home and want to finance the mortgage yourself, read on to learn more about how seller financing works.

What Is Seller Financing?

In seller financing, the seller assumes the function of the lender, in lieu of a bank or mortgage company. The seller essentially provides the buyer with a loan for the amount required to purchase the property, minus the amount of the down payment. The buyer and seller sign a promissory note that establishes the terms of the loan contract, and the buyer pays off the loan by making monthly payments to the seller.

Let's make a deal - hand shake

What are Typical Loan Terms? How can I structure the Loan?

As with most financing agreements, the buyer will typically make a down payment, and a time period will be agreed upon for the repayment of the loan. When the seller is financing the sale of the property, the time period is usually shorter than the typical 30-year period provided by most banks. In most cases, the loan might be amortized over 30 years but will be paid off much earlier through a balloon clause, which establishes a point at which the entire outstanding balance must be paid in full. 

Typically this happens after a 5, 10, or 15 year period, according to the agreement that the seller and buyer make, which can actually be a totally custom agreement. At that point, the buyer will most often refinance the balance of the loan with a traditional lender, at a better interest rate, having improved their credit score and earned some equity in the property. 

The seller also has the option of selling the promissory note or loan contract to a lender or investor, who will then collect the buyer’s monthly payments. 

While this may be an attractive option for the seller if they should suddenly desire a quick payoff, a promissory note will typically sell for only about 65% to 90% of its actual value, reducing the seller’s return on the sale of the property.

What is a Typical Down Payment on a Seller-Financed Home?

I find that sellers who would be willing to finance are looking for at least 25% of the property’s value as a down payment. Technically, as long as the buyer and seller agree, the down payment could be any amount. But most of the deals end up with a down payment of 30-50% of the property’s value.

Amortizing across the term of the loan or across a longer time-frame. What’s the difference?

When negotiating the loan terms, you can for example create a 5-year loan amortized over 5 years, which means that the monthly payments are set to pay the entire balance of the loan by the time you make the last payment in year 5.

Here is a sample of a 30-year fixed rate mortgage

Alternatively, another common agreement I have seen is a balloon loan, where you can have the loan amortized over any number of years. For example, you can set up the loan as a 5-year balloon loan with a 30-year amortization (this means the monthly loan payments are made is if you were to pay it over 30 years), which would cause a large balance to remain when you reach your last payment at the end of the 5th year of the loan. At that time you would be required to make a large balloon payment to pay off the full balance of the loan.

Here is a sample of a 5-year balloon mortgage with a 30-year amortization

Signing a contract

What Does a Seller Financing Contract Look Like?

Ideally, both parties should retain an attorney or real estate agent to compose and review the sales contract, promissory note, and all related documents that make up the loan contract. Hire professionals that are experienced with seller financed transactions and are local to your area if possible, because some regulations, such as those governing balloon payments, may vary by jurisdiction. 

Promissory notes are simple documents that typically include:

  • The amount of the principal debt
  • Terms of repayment
  • Interest rate
  • Repayment schedule
  • Details pertaining to balloon payment if applicable 
  • Late payment penalties
  • Early payoff terms
  • Transfer of mortgage and payoff terms in case the borrower sells the property  

A mortgage document or deed of trust is also included to provide protection for the seller, placing a lien on the property and stipulating the course of action if the buyer/borrower should default on payments. This document must be filed in court and provides the basis for foreclosure if it should ever become necessary. 

Seller Financing Interest Rates

There is no hard and fast rule for interest rates for owner financing, but it’s not uncommon for the interest rates to fall in the range of current market rates. That said, I would venture to guess that if you want to put a lower down payment or have a riskier credit profile the seller might want a higher interest rate, and the more you put down and cleaner your credit the lower you can take the interest rate. Also, if you are paying a premium in price for the property, the seller is likely to offer you more favorable financing terms, where as a typical lender won’t care or likely would not be happy to know you are paying a premium for the property.

Couple consulting with a Realtor

Seller Financing vs Rent to Own

The primary difference between a regular seller financed sales contract and a rent-to-own contract is the point at which the property changes hands. In a regular sales contract with seller financing, the property is transferred to the buyer’s name immediately upon closing. In a rent-to-own arrangement, the property is transferred to the new owner at the end of an agreed-upon period of time or a specified number of payments.

Seller Financing vs Conventional Financing

While there are some disadvantages for the seller in financing the sale of their own property, such as not getting the full amount up front, having to administer the loan, and risking the possibility of having to foreclose, there are plenty of advantages as well.  

The advantages to sellers include:

  • getting more for the property, because buyers looking for seller financing sometimes are willing to pay a premium, 
  • creating an opportunity for a buyer to purchase your home who would otherwise not be able to purchase it
  • and receiving a regular monthly income.  
  • Also, you can always foreclose and get the property back if the buyer defaults on payments.
  • sell a property that might not otherwise be financeable (for example a property with known structural defects or a condo with bad financials)
  • sale can happen a lot faster than a traditionally financed property, since you as seller are in control of the loan approval process

The advantages of owner financing for buyers include:

  • a way to build credit
  • a means to purchase a home you might not otherwise qualify for using traditional financing
  • come up with loan terms a typical lender might not offer you
  • much less paperwork to fill out and much faster loan approval
  • lower closing costs

Using a laptop, pen and paper

Where can I Search for Condos that Allow Seller Financing?

The best way to find seller-financed properties is by working with an experienced and knowledgeable realtor who has some insight as to the seller’s economic situation. A good realtor will know when a seller will likely be open to a creative financing negotiation. Basically, these are sellers who don't need the full payment for their property up front, and who would be interested in securing a monthly income source. Many sellers advertise seller financing as an option outright. Feel free to reach out to us at the contact info at the top of this page, and we will be happy to connect you to the right property that allows for seller financing.

Contact Sep Niakan
Founder, Condoblackbook.com & Owner/Broker, HB Roswell Realty
(786) 930-4220
contact@condoblackbook.com
Request Info
By sending you agree to CondoBlackBook's Terms of Use

Recent Posts

The Most Luxurious Condo Buildings in Downtown
Real Estate News The Most Luxurious Condo Buildings in Downtown
In recent years, Downtown has quickly grown into one of the Miami’s top neighborhoods, especially because of its central location to all that Miami has to offer. Developers are delivering world-class projects with unmatched luxuries in the core district. Today, a host of ultra-luxury buildings call Downtown home, and we’ve listed the 5 Most Expensive Condo Buildings in the neighborhood that set the bar for luxurious living. We’ve also included a few bonus pre-construction buildings that will soon give these a run for their money. Why Choose Downtown? Downtown is home to some of Miami’s best art, culture, shopping, entertainment, and social hotspots. It not only ties for #1 on our 11 Most Walkable Neighborhoods in Miami report, but also is the best neighborhood in terms of offering public transportation options. Living in Downtown, residents get easy access to the open-air Bayside Marketplace and Marina, lively AmericanAirlines Arena, iconic Perez Art Museum, Frost Museum of...
The Most Luxurious Condo Buildings in Venetian Islands
Real Estate News The Most Luxurious Condo Buildings in Venetian Islands
If you’ve always wondered which top-of-the-line luxuries are available in the exclusive Venetian Islands, then this is the list for you. We’ve ranked the Top 5 Most Luxurious Condo Buildings in Miami Beach’s Venetian Islands, which also happen to be the most expensive buildings of this super desirable neighborhood. Read on to find out what kind of amenities these top-class residences provide and which one made it to number 1… Why Choose the Venetian Islands? This island retreat is one of the most sought-after addresses in Miami Beach. Residents not only get to relish the joys, views and privacy of island living, but they’re also perfectly positioned for a short drive to South Beach and Downtown on either side via the Venetian Causeway. Secluded living and the option to easily dive into all the action in a matter of minutes makes Venetian Island properties some of the most prized in Miami, so much so that they’re also popular with the celebrities for their sheer exclusivity (in this...
Miami’s Most Artsy Condo Buildings
Real Estate News Miami’s Most Artsy Condo Buildings
Have you ever wondered which condos in Miami have amazing art inside? Well, as Art Basel kicks off this week, turning Miami into a playground for the who’s who of the international art world, we’re honoring the condos that honor the art. With over 4,000 artists expected to be showcased this year, the city is swarming with critics, collectors, curators, celebrities, and art and architecture lovers of every caliber. So in the spirit of this world-famous art festival, here’s seven of the Most Artsy Condo Buildings that are part of the creative narrative in Miami. Paramount Miami WorldCenter 900 NE 1st Avenue, Downtown Miami The Centerpiece: PAL-V, the flying car - a “Miami 2020 and Beyond” exhibit Although this is a 2019-only exhibit, it deserves a special mention. Complementing the amenity-rich tower’s 58th floor Skyport, PAL-V (Personal Air Landing Vehicle), a prototype of the world’s first flying car, will be on display during Art Week. Paramount is channeling the master himself,...
6 Fun Things to do During Miami Art Week that aren’t Art
Opinions and Advice 6 Fun Things to do During Miami Art Week that aren’t Art
Miami Art Week has become one of Miami's most dynamic, exciting, and wildly popular events, drawing millions of international visitors yearly, and showcasing the most cutting edge contemporary art from around the world from Art Basel and the multitude of fairs. While getting a healthy dose of art-watching is a wonderful way to stimulate your intellect and awaken your creative sensibilities, it's also important to take some healthy time away from all of that aesthetic stimulation. Below we've listed 6 fun things to enjoy during Miami Art Week that don't require you to try to understand anything abstract. Eat and DrinkEven if you're not that interested in the art, you can definitely enjoy all of the social activities and VIP parties that Miami Art Week brings to town. One of my personal favorite Art Week activities is savoring the tasty brunches that many of our local art spaces serve up during this special time of year. In particular, I can't wait to chow down at the free Creole...
Need a little Drama in Your Life? Theater is Alive and Thriving in Miami!
Lifestyle Need a little Drama in Your Life? Theater is Alive and Thriving in Miami!
One of the things that makes a big city special is its bounty of Arts & Culture offerings.  While many associate Miami with sunny beaches, glam fashion, and all-night-party culture, the Magic City actually has quite a sophisticated artistic life. In addition to the now-established December Art Week, including renowned Art Basel, Miami is home to several theatre companies and cultural venues that keep the performing arts scene thriving for both residents and visitors year round. To help you get to know the local theater scene, here are some of Miami’s most respected and celebrated theater companies and presenters, as well as the locales (some historic) where you can enjoy great theater in Miami! Arca Images One of Miami’s premier theater companies, Arca Images produces bilingual theater with simultaneous interpretation so that both English and Spanish-speaking audiences can enjoy the same show at the same time. Arca’s resident playwright is Pulitzer Prize winner Nilo Cruz, who...
Miami’s Can’t-Miss Holiday Events – Art Basel to New Year’s Eve Celebrations
Lifestyle Miami’s Can’t-Miss Holiday Events – Art Basel to New Year’s Eve Celebrations
"It’s the most wonderful time of the year," and Miami has turned into a magical wonderland once again. From the annual cheer at Santa’s Enchanted Forest to brand-new utopias like Fairchild’s NightGarden, there’s much to enjoy and marvel at this holiday season. The Nutcracker is on as usual and the legendary Art Basel is back in town, bringing with it a fine collection of art, artists, glamor, and parties. There’s also plenty of other events lined up for a bright and beautiful Hanukkah, Christmas, and New Year’s Eve. Read on to discover the complete list:   Miami Arts & Heritage Months: December 1, 2019 – January 31, 2020 Various venues across Miami Whether you’re visiting from out of town or are a local, the art and heritage months from the Miami Temptations Program provide a great window into the diversity of the Magic City. Explore our most culturally diverse communities with ‘Buy One, Get One Free’ tours, special discounts and absolutely free visits. Find the complete list...