Seller Financing in Simple Terms
In a traditional purchase, the buyer brings a down payment and mortgage proceeds, and the seller receives the purchase price. The seller usually walks away from closing after existing liens and costs are paid.
With seller financing, the seller agrees to receive some of the purchase price over time. For example:
Purchase price
$500,000
Buyer cash down payment
$100,000
Seller-financed balance
$400,000
The buyer might then make agreed monthly payments to the seller according to a promissory note and security documents. That is a simplified example only.
Does the Seller Give the Buyer the Deed?
The structure matters. In one common seller-financing structure, the buyer receives title at closing and gives the seller a promissory note secured by a deed of trust or other legally appropriate security instrument.
In an installment land-sale contract, title may remain with the seller until specified contractual requirements are met.
Nevada law specifically recognizes a “land sale installment contract” as an arrangement in which the buyer pays over time while the seller retains title until the contract price is paid and title is then transferred.
These arrangements are not interchangeable. Use legal counsel and title/escrow professionals.
Why Would a Seller Offer Financing?
Possible reasons include:
Larger Buyer Pool
A buyer may not fit traditional financing but may still be financially capable of performing.
Income Stream
Instead of receiving every dollar at closing, the seller receives scheduled payments.
Interest Income
The seller may receive interest according to the financing agreement.
Negotiation Flexibility
The parties can negotiate down payment, interest rate, amortization, maturity date, balloon payment, security, and other lawful terms.
Property Is Difficult to Finance Traditionally
Some properties do not fit ordinary lender requirements cleanly.
Why Would a Buyer Want Seller Financing?
Possible reasons include: self-employed income, nontraditional income, a recent credit event, a property issue, a faster transaction, negotiated terms, or a traditional lender not being available.
But seller financing should not be viewed as a free pass on qualification.
“NO QUALIFICATION REQUIRED.”
is not the right way to think about it.
The seller is becoming the creditor. That makes repayment risk very real.
Does Federal Mortgage Law Apply?
Potentially. Federal Regulation Z contains specific rules concerning when certain seller financers are excluded from the definition of a loan originator.
For example, current rules distinguish between a natural person, estate, or trust financing only one property in a 12-month period and persons financing three or fewer properties, with different requirements applying to those structures.
This is exactly why seller financing should not be created from an internet template.
Does the Seller Have to Check Whether the Buyer Can Pay?
Depending on the applicable seller-financing structure and federal rules, ability-to-repay requirements can matter. Current CFPB Regulation Z provisions for some seller financers specifically require a good-faith determination that the consumer has a reasonable ability to repay.
Get the structure reviewed before offering seller financing.
Does the Seller Need Security?
A seller providing financing generally wants proper legal security. Without properly prepared and recorded documents, a seller can expose themselves to enormous risk.
That can involve a promissory note, deed of trust, escrow, title insurance, a servicing arrangement, and appropriate disclosures.
The precise documents should come from qualified professionals.
Example
Seller owns a home free and clear. Sale price:
Sale price
$600,000
Buyer cash down payment
$150,000
Seller finances
$450,000
Terms might include
agreed interest rate
The financing may involve an agreed interest rate, a monthly amortized payment, a defined loan term, a balloon payment if applicable and lawful, and a recorded security interest.
The seller now has something similar economically to a mortgage receivable. The buyer owns the home subject to the seller's secured interest under that structure.
What If the Buyer Stops Paying?
That is one of the biggest questions. The seller may need to use the remedies allowed by the contract, the security instrument, and Nevada law. That can include foreclosure or other enforcement depending on the structure.
This is not the same as taking back a rented apartment.
Seller Risk
Seller financing creates risks such as:
- Buyer defaults
- Property deteriorates
- Taxes become delinquent
- Insurance lapses
- Legal enforcement becomes necessary
- Seller needs money sooner than expected
- Balloon payment fails
Buyer Risk
Buyer risks can include:
- Higher interest rate
- Large balloon payment
- Poorly drafted documents
- Seller still has an existing mortgage
- Due-on-sale issues
- Seller financial problems
- Improper servicing
- Title defects
How Lisa Helps
Lisa can help the real estate terms and coordinate the transaction with the seller, buyer, attorneys, title/escrow, and appropriate financing professionals.
Interested in properties where a seller may consider financing? Lisa can make that part of the search and negotiation strategy.
She should never personally create complex seller-financing legal documents. The attorney, lender, tax adviser and servicing professional handle the financing structure; Lisa identifies and negotiates the real estate opportunity.
