This blog accompanies the text, Real Estate Analysis: Environments and Activities by Julian Diaz III and J. Andrew Hansz. Student are encouraged to post assignments and original research papers to this blog. Please contact firstname.lastname@example.org for posting rights or to add your program to the blog. Some blog posts and objective questions maybe considered for publication in a future edition of the text.
Monday, April 9, 2012
Non Traditional Lending: Seller Financing
Forrest Miller Blog Post 2
Seller financing is a type of lending where the seller issues a loan to the buyer so that the buyer does not have to go through traditional methods of acquiring funding. Through traditional financing a buyer goes to a lending institution such as a bank, to file for a loan and establish a mortgage. Part of this traditional loan process involves various stages of qualifications in order to be eligible to carry a loan. Such stages involve credit checks to make sure you have a proven track record of paying back loans or obligations, existing assets to put up as collateral, existing cash flows in order to make sure you are able to pay back the loan, and various other stages of qualification can be included.
If you are in a situation where you do not meet these qualifications, chances are slim you will still get the house of your dreams, however if the seller is motivated they may offer a private mortgage enabling you to proceed with acquiring the asset. There are many different types of seller financing and every single situation is different. A few types of seller financing include All-inclusive mortgage, junior mortgage, Land contract, Lease option, assumable mortgage, and promissory notes and mortgages.
When participating in a seller-financed deal, things can get creative to fit the needs of both parties. Since the seller is taking on the role of the bank, the seller is responsible for choosing the interest rates, writing the terms, and determining the down payment for the property. Negotiations can and usually are made so that the deal works for both parties. Most of the time interest rates are a little bit higher in seller financed deals than traditional loans in order to compensate for the increased risk associated with the deal. However, most buyers do not mind the higher interest rates because they usually cant qualify for traditional lending, or else they would use it.
Other then qualifications, Seller financing has many advantages to it for both the buyer and the seller. For the seller, private mortgages offer them the opportunity to receive a higher price for the property, more net cash through installments rather then a heavily taxed lump sum, and a faster closing period without all the qualification, appraisal, and other various hassles with traditional sales. For the buyer, the benefits include very minimal, if any qualifying, financing that is tailored to fit both parties needs including interest rates, the down payment is flexible and can even be non existent in some instances, and an overlapping benefit is the faster possession.
Seller financing is a great alternative to traditional lending sources. It has many benefits and creativeness that can be tailored to the parties needs. Its faster then traditional lending and does not have as many closing fees. However, these benefits do not come with out a price. There is a great amount of risk that comes along with seller-financed deals. If something goes wrong, more then likely the seller will have to eat the loss. It is recommended to consult a real estate attorney who has experience in this niche before participating in any seller-financed deals.
For more information watch this video:
Perkins, Broderick. "Seller Financing: How It Works in Home Sales."Nolo Law For All. Web. 09 Apr. 2012. <http://www.nolo.com/legal-encyclopedia/seller-financing-home-sales-30164.html>.
Yanos, Melana. "Seller Financing for Real Estate: What Investors Should Know."NuWire Investor. NuWire, 25 Jan. 2008. Web. 07 Apr. 2012. <http://www.nuwireinvestor.com/articles/seller-financing-for-real-estate-what-investors-should-know-51407.aspx>.
"Seller Financing Tips for Rates, Terms, and Cash Down."Financial Web. Internet Brands Inc. Web. 09 Apr. 2012. <http://www.finweb.com/mortgage/seller-financing-tips-for-rates-terms-and-cash-down.html>.
FLETCHER, JUNE. "The Wisdom of Seller Financing."Selling a House. The Wall Street Journal, 28 Aug. 2009. Web. 07 Apr. 2012. <http://online.wsj.com/article/SB125147241384166991.html>.