Seller Financing. What Is It?

Seller Financing in Real Estate is nothing more than a loan provided by the seller of the property to the buyer of the property.  Like more traditional ban financing, the buyer will typically make a down payment and then make monthly installment payments over time (based on an amortization schedule) and at a specified interest rate until the loan is paid off.  So in the simplest of terms, in a seller financed real estate transaction, the seller of the real estate takes the place of the bank.

Seller Financing: Dawn Rickabaugh

These two short videos by Dawn Rickabaugh offer an excellent introductory presentation to Mortgage Notes and the Note business.


Benefits to the Buyer and Seller

In any seller financed real estate transaction, there are certain benefits to both the buyer and seller such as:

  • Buyers with marginal credit and unable to arrange a bank loan can purchase a property
  • Buying seller financed property has simplified closing and less paper work
  • Seller can obtain “top dollar” for the property due to providing the financing
  • Seller has a larger selection of buyers to choose from
  • Seller can obtain a high investment return (interest rate) on the note
  • Both the seller and buyer save on closing costs
  • There are seldom PMI insurance requirements unless negotiated

Discount Notes:  The Secondary Market in Seller Financed Mortgage Notes

There is a very active secondary market in seller financed mortgage paper known as the Discount Note Market.  Here, investment firms, which are sometimes banks, actively pursue quality seller-financed paper as investments.  Brokers are also common in the industry acting as “finders” or middlemen matching holders of seller financed paper with the institutional buyers and earning a “finders fee” for making the introduction.

Sub-Prime Paper and Risks

All seller-financed paper is typically considered sub-prime paper since if the buyer could arrange for less expensive bank financing, they would.  Still, with the home as collateral for the loan, the only major risks to the seller who provides the financing are risks involving the length of time it might take to foreclose on the property in the event of default and the damage that might be done to the property under such circumstances.  These risks can usually be addressed by requiring a reasonable down payment such as 20%.