(CHEROKEE LAKE REALTY WRITES A WEEKLY COLUMN FOR THE GRAINGER COUNTY JOURNAL NEWSPAPER. THIS WAS A RECENT QUESTION ASKED BY A READER.)
A seller financing option is like a conventional loan. The big difference is that the seller plays the role of the bank/mortgage company. In other words, the seller is the bank. The seller holds the note, mortgage, until the buyer pays it off. Then the buyer owns it free and clear. The transaction should be done at a title company, where the terms of the loan are agreed to in writing. There is a promissory note, specifying the terms of the loan, and a deed of trust, showing the seller as the lien holder of the property until it is paid off. Same as a bank would do. Now, just as a typical bank mortgage, you are responsible for keeping your property taxes, insurance, maintenance, and any HOA fees current. Basically, you own the property. But again, until the mortgage is paid off you will not receive a release that the seller no longer has a lien on the property. So, yes, the buyer is protected if these issues are put in writing by the title company and agreed to by the seller and buyer. I don’t recommend that an agreement be written up by a seller and a buyer on their own. Again, for legal reasons this should be done by a third party, a real estate attorney and/or a title company.
Seller financing can provide benefits for both the seller and buyer. The seller receives a down payment and collects interest for the term of the loan which can add up to thousands of dollars in additional profit. The seller is protected legally if the buyer defaults and can foreclose on the property, just like a mortgage company would do. The buyer can save thousands of dollars on the loan by dealing directly with the seller. A bank/mortgage company will charge the buyer application, appraisal, and origination fees. Plus, closing cost fees. When you add all this up you are looking at thousands of dollars in fees, above what the buyer is already paying for the property. Seller financing transactions will generally only cost you a few hundred dollars since the steps that a bank requires are not necessary with seller financing. Plus, interest in a commercial bank loan is higher than what the seller will typically charge you. And there is always the chance that the bank will deny your loan because of your credit. A lot of seller financing transactions advertise that they will approve you automatically. In summation, seller financing transactions can be a win-win for the seller and buyer. The seller can advertise seller financing and bring in interested buyers that would not want to deal with a bank for whatever reason. The buyer can save thousands of dollars on fees. The seller can collect interest in the sale. But, keep in mind, this is still a mortgage. If the terms of the loan are not met, just like with a bank loan, the property can be foreclosed, which can turn into a hassle for both the buyer and seller.
