What is seller financing? According to the California Association of Realtors, seller financing is when a seller of a property extends credit to a buyer to assist in paying the purchase price of the seller’s property. For any number of reasons including bad credit, unverifiable income, buying an unconventional property, and more, a buyer may be unable or unwilling to qualify for a traditional mortgage. As a last resort, the buyer can ask the seller if they are willing to act as the financier. If the buyer and seller can agree to terms, the seller in essence becomes the buyer’s bank.
Since seller financing usually comes about due to a deficiency on the buyer’s end, the buyer can expect the terms of the financing to favor the seller, usually through a higher interest rate. Note that there are a couple of caveats: The seller must own their property outright (no mortgage), and the term of the financing will generally be much shorter than a traditional 30-year mortgage. For instance, a buyer wishes to purchase a seller’s property, but because of bad credit, can’t qualify for a mortgage. The seller agrees to offer financing for a three-year period, giving the buyer time to build their credit and equity. After the three-year term is up, the buyer qualifies for a mortgage and the seller conveys the property to the buyer. This is a very simplified example, but it’s the general idea. Seller financing may also come about because the property being sold is not lendable, making this a cash sale. An example here could be a house with no foundation. The seller knows that a bank won’t lend on the property, so instead agrees to seller financing just to get the house sold.
In 20 years in real estate, we have only had one transaction using seller financing, but in that instance, it saved the deal. The buyers were purchasing a home with an unpermitted in-law unit, and using their 401Ks, so we knew conventional financing might be tricky. At the eleventh hour, the buyers discovered they could not qualify, and even went so far as to bring in an additional buyer to make it work. The lender still said no. To keep the deal together, buyer and seller were able to agree to terms of seller financing, and the deal was finalized. Although it remains rare in our resort market, seller financing may be a possibility when all other options have been exhausted.