Before there were banks, there was Seller Financing. It’s as old as the Good Book.
So what is Seller Financing?
When a seller allows a buyer to make payments over time for the purchase of property, it is known as owner financing or seller financing.
This form of private financing can take the place of a bank loan, or today it can be in addition to a conventional mortgage.
The terms are negotiable between the seller and the buyer, and of course it should be weighted in the seller’s behalf. The payment amount, interest rate, number of payments, and down payment are agreed upon between the buyer and seller. The amount financed by the seller will depend upon the amount of the down payment and whether there are any bank loans.
Here’s an example of a seller financing:
In my neighborhood is one of the most beautiful homes, on a gorgeous lot, with a spectacular view. My neighbors have lived there for over 35 years. He’s now a retired orthodontist, but how did he afford to buy this house when he was just getting out of school and starting a practice? I asked his wife this? She said when they were first married, her husband met the owner of this house at a dentistry golf tournament, and he later was at a social function at his house. This was the beautiful house at which they now own.
The young man asked the older, established dentist, “If you ever decide to sell this house in the next five years, would you consider selling it to me and letting me make payments to you directly?” The dentist agreed that he would contact him, if he should decide to sell. Well about 4 years later, the dentist and his wife did decide they wanted to move, so they called the young orthodontist, and asked if he’s still interested. “Of course I am!” Both men got together and decided on terms, and the young couple moved in.
They have raised their children there, and to this day you can see their grand children playing on the monstrous play equipment in the yard.
While I don’t know the specifics to this deal, let’s imagine that it was:
- House built: 1950
- Value of property in 1981 = unknown
- Date of Sale: 1981
- Sold at $90,000
- Terms: 360 months, 15% interest, taxes = .7 (back then), Insurance = $110/year
- Monthly payment = $1,237.17 per month, including Principal, Interest, Tax and Insurance.
Today’s value = $700,000
All the while the seller is holding the note, and the collateral to the note is said house and land. The note value of $55,000 has stayed the same, minus payments received; but the collateral value has increased by 127%! The seller should feel very well protected in this investment, earning 15% annually, with collateral to back it up.
The note is the instrument that spells out the terms of repayment. In this case the interest is 15.0% on a 360-month amortization. If the seller wants to be paid off earlier than the full 30 years, the seller and buyer could agree upon a balloon payment date to pay off the note. Another option the seller has, is that the he/she can sell the note to a note buyer. The Note has value.
A title company or real estate attorney is used for the closing to be sure all parties are protected and the documents are in compliance with state laws.
The After Story: The buyer’s made their payments timely, and when the 1980’s high interest rates were past, they began their re-financing rituals. As interest rates dropped, they refinanced, like most home-owners in America. However, this time they went through conventional banks, and paid the private seller off.