We’re Buying Our Next Property Through Seller Financing.
We’re buying our next four-unit property through seller financing, and we would like to do more of these types of transactions.
Seller financing can be a beneficial option for both the seller and the buyer. As the seller, you may be able to defer capital gains taxes, continue receiving monthly payments, collect a down payment, earn interest, receive principal payments, negotiate a balloon payment, and more.
Seller financing is generally simplest when the property is owned free and clear. However, if there is an existing mortgage on the property, other creative financing structures may be possible, such as a wraparound mortgage or purchasing the property “subject to” the existing mortgage. These structures can carry additional legal and financial risks, including potential due-on-sale issues with the existing lender.
As a seller, you would generally want to consider this type of creative financing with credible investors who have experience, a strong track record, and the financial ability to perform.
Seller financing can be great for buyers as well. There’s no traditional bank involved in the seller-financed portion of the transaction, and nearly every major term can potentially be negotiated. A buyer may even be willing to pay a little more for a property in exchange for financing terms that make the overall deal work.
Seller financing can also give a seller another option to consider alongside a traditional cash or bank-financed offer. Instead of negotiating only the purchase price, the buyer and seller can negotiate the entire structure of the transaction.
Seller Pros
- Potential capital gains tax deferral — Depending on how the transaction is structured and the seller’s individual tax situation, some capital gains may be recognized over time rather than entirely in the year of sale.
- Monthly principal payments
- Interest income
- Balloon payment
- Down payment
- First-lien position if the property is owned free and clear and the seller’s mortgage is properly structured and recorded
- Potentially higher purchase price in exchange for favorable financing terms
- Consistent income stream from the property without the responsibilities of being a landlord
Seller Cons
- The seller doesn’t receive all of their money up front
- Buyer default risk
- The seller remains financially connected to the property
- Inflation risk — Fixed monthly payments may become less valuable over a long period of time
- Foreclosure risk and costs if the buyer defaults and the seller has to enforce the mortgage
- Capital remains tied up until the loan is paid off, refinanced, or reaches its balloon payment
Buyer Pros
- Potentially lower down payment
- Potentially lower closing costs
- More flexible qualification requirements
- Negotiable interest rate
- Negotiable amortization period
- Potential for interest-only payments
- Negotiable balloon-payment period
- Potentially faster closing
- Less reliance on traditional bank underwriting
- Ability to negotiate the entire deal structure, not just the purchase price
Buyer Cons
- Potentially higher interest rate
- Large balloon payment
- Shorter loan term
- Potentially higher purchase price
- Refinancing risk when the balloon payment becomes due
- Fewer standardized protections and terms than traditional institutional financing
