The Pros and Cons of Seller Financing
Seller financing is an agreement between buyers and sellers of real estate. Instead of buyers obtaining a mortgage from a traditional lender, such as a bank, the seller of the real estate finances it for the buyer. Seller financing has many benefits for both buyers and sellers, particularly when the conditions of the real estate market are challenging. Below, our Tampa real estate lawyer explains the benefits and drawbacks of seller financing for both buyers and sellers.
Pros for Buyers:
The biggest benefits for buyers in a seller financing are as follows:
- Faster closing: Without any involvement from an underwriter, loan officer, or legal department, the closing process is much more streamlined.
- More affordable closing: The closing process is more affordable due to a lack of bank fees and appraisal costs.
- More down payment options: Seller financing does not have the same down payments requirements as traditional mortgages.
- Easier to obtain: For buyers who do not qualify with traditional lenders, real estate is easier to obtain when the seller finances it.
Cons for Buyers:
While seller financing has many benefits for buyers, there are also some drawbacks. These include:
- Higher interest rate: Interest rates in seller financing agreements are usually higher than those in a traditional mortgage.
- The willingness of the seller is critical: If the seller is not willing to finance the property, there is no agreement.
- Lump sum payments: Seller financing agreements usually require buyers to pay a large lump sum five or ten years after the agreement is initially signed. If buyers are unable to make this payment, they will lose the property and all payments they have made.
Pros for Sellers:
Sellers, too, may face certain risks and benefits. Some of the biggest advantages for sellers are as follows:
- Good rates of return: Real estate is one of the best investments a person could make. Sellers may get a larger return on their investment than they would investing that money elsewhere.
- Sell to other investors: Owners can sell the promissory note to an investor, which can provide them with a lump sum payment.
- Sell the home ‘as is’: Lenders often require certain repairs be made to a property before a property can be sold. With seller refinancing, owners can sell the property as is.
- Secured investment: If the buyer defaults, owners can retain the down payment and any payments made on the property.
Cons for Sellers:
Like buyers, there are some drawbacks for sellers who choose to finance, too. These include:
- The Dodd-Frank Act: The Dodd-Frank Act places rules on financing that can impact balloon payments. The same law also requires loan originators on many transactions.
- Costly repairs: In the event that the seller must take the property back, they are responsible for the cost of any needed repairs.
- Buyer default: If the buyer defaults and refuses to leave the property, sellers may have to begin the foreclosure process which can be time consuming, but its risks are often mitigated with the inclusion of an attorney’s fee clause in the mortgage.
Our Real Estate Lawyer Can Help with Seller Financing
Seller financing has many benefits, but there are drawbacks to these arrangements, too. At Messina Law Group, P.A., our real estate lawyer can help you avoid the pitfalls that sometimes occur so you only reap the benefits. We also have offices in New Port Richey OR Tampa, Wesley Chapel, and Dunedin. Call us now at (813) 492-7798 or contact us online to schedule a consultation and to get more information.
Source:
cftc.gov/LawRegulation/DoddFrankAct/index.htm
