In a previous post, we talked about the various types of money loans (read here). One of the types we briefly discussed was the Seller Financing Loans. We would like to spend more time going into more details.

What is it?

Typically, when a seller sells you a property, no matter how you come up with the money, whether it is cash from your bank account, borrow from your parents, get a mortgage, at the end the seller receives a lump sum of the proceeds at the close of the transaction.

But in a seller financing situation, instead of paying the seller the lump sum, the seller agrees to receive a series of payments over a period of time.

Why do I (the buyer) want this?

There are many reasons why a buyer should opt for seller financing if such option is available. But the common reasons are:

• Does not show up on your credit report
• More favorable terms
• Less hassle qualifying / underwriting
• Less fees

Why does a seller offer this?

The most common reason for a seller is that the seller does not want to receive a lump sum of proceeds right away, because the seller may be in a situation that requires a huge tax payment as a result.

By spreading the profits to be received over time, it reduces a big chunk of net profit and allows the tax obligation to be spread more evenly over the years.

Another reason a seller may want payments over lump sum is the seller wants to pay additional income. For example, the seller may not have any immediate need or idea to invest the profit, so instead of letting it sit in the bank as cash earning 0.01% interest, it actually makes more sense for the seller to offer you financing and get X% in return.

Last but not least, another possible reason is that the seller may not have good finance management habits, and he or she may be afraid to lose all the profits if received as a lump sum. By receiving payments over time helps the seller manage the profits. It is essentially the same concept as getting 1 cash payment vs. 20-some years of annual payments if you win the lotto.

How do you approach it?

Many sellers may not even know they can offer a seller financing option. So as an experienced buyer, it becomes our job to present that option and to educate the sellers. Going at this from a psychological standpoint, humans like to have options, that is why we suggest the following methodology:

Present 2 or 3 offers to the seller, with the following:

Offer 1 (if possible): Present an All Cash offer that has a purchase price of 5%-10% of the market value

Offer 2: Present a traditional bank mortgage offer that has a reasonable purchase price based on the market condition

Offer 3: Present a seller-financed offer that has a reasonable purchase price, plus the financing options that lays out the initial down payment, the interest rate, the loan duration, the scheduled monthly payment, the scheduled start payment date, and the schedule last payment date.

You never know what the seller may end up choosing! Interested to discover more ways to get loans? Click here to find private money lenders for your real estate deals.