A lot of people have been asking me lately about seller finance, so I’m making a short blog entry about this little known investment strategy.
What is seller finance?
Seller finance (aka vendor finance) is a loan given by the seller to his or her buyer. Under these terms, the buyers will be giving monthly payments to the seller as though the seller was the bank. But what separates this from usual bank loans is that it opens the possibility of more “friendly” terms such as paying a lower deposit. There are quite a number of investors, such as Rick Otton, utilising this form of financing.
What happens when the buyer defaults in his payments?
Then there will be no title transfer and the buyer will have to move out.
When can seller finance be used?
Whenever a buyer – for some reason or another is unable to acquire bank financing (can’t raise the deposit, doesn’t have a good enough credit history, unable to show proof of income), then seller financing becomes the next best option.
What are the benefits of seller finance?
If you are a seller having a difficult time finding buyers, providing terms that are easier to meet than the requirments of the bank may help improve your prospects. More leads mean more offers and more offers improve the chances of securing a detail. When done right, seller finance can help speed up the sale process.
The obvious benefits for the buyer is that they won’t have to waste their time gathering tons of loan requirements and wait for years just to save the right amount of deposit fee.
Are there any disadvantages in these deals?
On the part of the seller, the biggest risk is the possibility that the buyer won’t have the proper capacity to pay. So if you decide to sell your property using seller finance, you will have to take the time to screen all applications yourself. This can be a tedious process. But if you don’t want the hassle of contending with a delinquent buyer, it’s best to be thorough.
The buyer, on the other hand, may pay higher monthly payments compared to the regular bank loan. Payments and interest will be dependent on the agreed upon terms with the seller. But one of the reasons why monthly payment is higher is because seller finance terms usually take place over a shorter period of time, unlike bank loans that extend up to 30 years.
How do you minimise the risks?
Sellers must take the time to ask pertinent questions. For instance, it’s important to verify that the buyer has a source of income. Granted, anyone can say that they have a job. But those with a stable income are usually more prepared to make a down payment.
Upfront costs in seller finance are already much lower compared to a regular 10-20% deposit required by banks. So if the buyer is hesitant to make a down payment, you should probably be looking at the next prospect.
Moreover, everything has to be in writing so that none of the parties can take advantage of the other. Hence, both the seller and the buyer should have their own barrister. They can explain what their terms should be, and the barristers will be responsible in putting the terms into writing.