Seller financing is a transaction where the seller agrees to receive regular payments, typically monthly from the buyer instead of a lump sum payment until the agreed upon amount is paid. As in any normal sale, a down payment is negotiated between the parties. It is a simply a case of seller agreeing to lend money to the buyer to purchase and close on the property. The seller transfers the ownership of the property to the buyer at the closing. In return the seller receives a mortgage, entitling him to a schedule of payments and a lien on the property until the loan is repaid. It is also called owner financing, or owner carry-back.

Seller financing differs from conventional loans. The seller does not give the buyer cash to purchase the home as a lender does. The seller instead extends credit to the buyer against the purchase price of the home and the buyer executed a promissory note and trust deed (or mortgage) in favor of the seller. The buyer will generally be required to give the seller a down payment, make monthly installments on the loan and have to pay interest.

From a seller’s point of view, seller financing will increase the pool of potential buyers. There are many buyers who look only for properties offering seller financing. The deal can be closed quickly as the formalities to be completed are few. If one or more payments are received on the sale of a property after the tax year in which the sale occurred, the IRS will treat such a sale as an installment sale and will tax only the percentage gain reflected by the payments received in that year and not the entire gain. Seller financing spreads the gain over time and helps reduce taxes as taxes are paid as payments are received. Spreading a large gain over time can prevent being bumped into a higher tax bracket.

Owner Financing Benefits to Home Sellers

Higher Sales Price.

Because the seller is offering owner financing, the seller may be in a position to command full list price or higher.

 Tax Breaks.

The seller might pay less in taxes on an installment sale, reporting only the income received in each calendar year.

Monthly Income.

Payments from a buyer increase the seller’s monthly cash flow, resulting in spendable income.

Higher Interest Rate.

Owner financing can carry a higher rate of interest than a seller might receive in a money market account or other low-risk types of investments.

Shorter Listing Term.

Owner financing attracts a different set of buyers. If a property is not selling under conventional methods, offering owner financing is one way to stand out from the sea of inventory and move a hard-to-sell property that otherwise might not sell.

In closing, before entering into a transaction with owner financing, consult a real estate lawyer and obtain competent legal advice.

Owner Financing Benefits to Home Buyers

 Little or No Qualifying.

Even if the seller demands a credit report on the buyer, the seller’s interpretation of buyer qualifications are typically less stringent and more flexible than those imposed by conventional lenders.

Tailored Financing.

Unlike conventional loans, sellers and buyers can choose from a variety of payment options such as interest only, fixed-rate amortization, less-than-interest or a balloon payment. Payments can mix and match. Interest rates can adjust periodically or remain at one rate for the term of the loan.

Down Payment Flexibility.

Down payments are negotiable. If a seller wants a larger down payment than the buyer possesses, sometimes sellers will let a buyer make periodic lump-sum payments toward a down payment.

Lower Closing Costs.

Without an institutional lender, there are no loan or discount points to pay. No origination fees, processing fees, administration fees or any of the other assorted miscellaneous fees that lenders routinely charge, which automatically saves money on buyer closing costs.

 Faster Possession.

Because buyers and sellers aren’t waiting on a lender to process the financing, buyers can close faster and get buyer possession earlier over a conventional loan transaction