Typically, real property is purchased with funds raised through financing. Financing is often provided by a bank or third party that takes back a mortgage on the property as security for the funds loaned. When the Seller provides the financing, instead of a bank or other third party, the loan is called “Seller Financing”. With Seller Financing, the seller will loan all or part of the sales price and take back a mortgage on the property as security. This means that the buyer can come to closing with less cash, and promise to pay a certain amount to the seller over time, with interest. This promise to pay is evidenced by a Promissory Note and generally secured by a Mortgage or Deed of Trust on the property. If the buyer defaults on that promise to pay, the seller can foreclose on the mortgage and take back the property.

For example, a seller agrees to sell and buyer agrees to buy a property at a sales price of $500,000. If the buyer has only $50,000 in cash and the buyer does not want to go to a bank for the remaining $450,000, the seller can offer to finance the remaining $450,000, taking back a Note (promise to pay) and Mortgage (security) of $450,000 rather than cash. If the loan bears interest at a rate on 7%, the seller will collect $31,500 the first year in income, in addition to any principal that is paid.

There are no lender fees, loan fees, or points charged for Seller Financing, so the buyer pays less in transaction costs. And with no underwriting or appraisals, the seller can attract buyers that would otherwise not necessarily qualify to purchase the property. If the seller has made money on the property, Seller Financing can defer the capital gains tax, payable as the principal is repaid under the Seller Financed loan.

Seller Financing can facilitate a sale that would not otherwise happen, and benefit both the buyer and seller.

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