Reasons for Seller Financing: A Seller may be interested in selling a property and carrying back a Promissory Note & Deed of Trust for a number of reasons. The Seller may feel the property will sell quicker, the property type may make it difficult to find conventional bank financing, or the Seller is interested in the interest income generated from the Seller carry-back Note & Deed of Trust (or Note & Mortgage or Contract For Deed). A Buyer may be interested in buying a property where the Seller will carry back a Note & Deed of Trust for a number of reasons. The Buyer may have credit issues, the property type may make it difficult to find bank financing, or the Buyer may have relationship with the Seller and they’ve mutually agreed on a reasonable transaction. The reasons for seller financed transactions are as varied as the Sellers and Buyers. Oftentimes the idea of owner financing is overlooked simply because the parties are unfamiliar with the pros and cons. What is Owner Financing? When part or most of the purchase price is paid not by a cash sale or bank financing, then the Seller is providing owner financing. The Seller is not lending the Buyer money, but rather part of the purchase price is carried by the Seller and secured by a Promissory Note and Deed of Trust (or other real estate lien instrument). The property sale price is often determined by comparing similar properties in the area or obtaining an appraisal. Depending on the property type, the Buyer is encouraged to obtain a home inspection. After a price is agreed upon, the terms of the Note are discussed and agreed upon. Often when the Seller and Buyer aren’t negotiating directly, it will be an offer and counter offer as to terms. Most Sellers require the Buyer to make a cash down payment equivalent to 20%-30% of the sale price with the balance of the price carried back on a Note. The interest rate often will be determined by the strength of the Buyer, property type, and the going conventional rates. The Seller carry-back rate may be higher than bank financing due to the Seller’s less stringent buyer requirements. The benefit to the Buyer is the transaction is greatly simplified and more do-able because they are not having to spend hours providing seemingly endless information to the lender, only to find one more item is missing. The length of the note can be negotiated. It might be largely determined by the size of the monthly payment the Buyer feels comfortable with, along with the required annual property taxes and estimated property insurance. Depending on the particular transaction, a balloon...
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