Seller Financing in Real Estate

Seller Financing

• Seller financing is when a seller agrees to finance a portion of the buyer's purchase price, instead of a traditional loan from a third party.
• It can be used as primary or secondary financing.
• Seller financing can be in the form of a purchase money loan or a land contract.
• A seller second supplements an institutional first mortgage.
• Seller financing may be used when interest rates are high or if the buyer has difficulty qualifying for a loan.
• Real estate agents should recommend that sellers and buyers seek the advice of a lawyer for any type of seller financing.
• Disclosure statements are essential to ensure all financing terms are disclosed, typically with a real estate lawyer.
• A seller can use a promissory note and security instrument to finance the buyer's purchase creating a purchase money loan or seller carryback loan.
• Agents must be aware of state and local laws surrounding seller financing.
• Seller financing might include alternative arrangements like seller financing as primary financing or when the property has no liens.

Learning Objectives

• Students should be able to discuss when and why seller financing is used and how it works.
• Define the term "seller second" and describe its function in financing, whether it supplements an institutional loan or is used as primary financing.
• Understand how seller financing is used as primary financing, possibly as the only financing source.
• Detail the differences between a land contract and a mortgage or deed of trust.
• Explain wraparound financing and its workings, understanding it as a way to avoid paying interest on the existing first mortgage.
• List alternatives to seller financing, such as buydowns, contributions to closing costs, equity exchanges, lease-option arrangements, and lease-purchase arrangements, and understand them as ways to help buyers.
• Summarize an agent's responsibilities in a seller-financed transaction, including appropriate disclosures.
• Real estate agents should review disclosure statements to ensure all financing terms are disclosed, and should recommend that all parties seek legal advice.

Types of Seller Financing

• Purchase Money Loan: A loan the buyer makes directly to the seller instead of a third-party lender. This is often in the form of a mortgage or deed of trust, where the seller holds the deed until the loan is repaid or a promissory note is exchanged for the sale.
• Land Contract: The buyer takes possession but the seller retains title until the full purchase price is paid, often in monthly installments. The buyer becomes the legal title owner when the agreed-upon price is met.
• Seller Second: Financing supplementing an existing institutional first mortgage or loan, reducing the amount the buyer needs.
• Wraparound Financing: The seller finances its portion using an existing mortgage or loan, creating a "wrap" around it to finance the full purchase price.
• Land Contracts: The buyer possesses the property, but the seller keeps title until repayment, a different approach from traditional financing. The buyer becomes legal owner after full payment.
• Other types of seller financing might include buydowns, contributions to closing costs, equity exchanges, lease-option arrangements, and lease-purchase arrangements.

Alternatives to Seller Financing

• Buydowns: The seller pays points or fees to reduce the buyer's interest rate on a mortgage.
• Contributions to Closing Costs: The seller's contribution toward buyer closing costs, such as fees.
• Equity Exchanges: The seller might accept another asset for a portion of the cash price, such as property.
• Lease/Option Arrangement: This lets a buyer lease property while having an option to purchase it.
• Lease/Purchase: A lease and purchase agreement is signed simultaneously, allowing the buyer to lease and then purchase at the end, often using a deposit.

Legal Responsibilities in Seller-Financed Transactions

• Agents should recommend legal and tax advice for every seller financing transaction.
• Agents must ensure disclosure statements include all relevant financing terms, especially with third-party involvement.
• Agents must avoid situations of dual agency and should recommend that all parties seek legal advice.
• Real estate agents should ensure that required disclosure documents are reviewed by all parties and seek legal advice if needed.
• Real estate agents should be aware of state/local laws in all seller-financed transactions.

This quiz covers the concept of seller financing, examining its role as an alternative to traditional loan methods. Students will learn about various forms of seller financing, including purchase money loans and land contracts, and understand the agent's responsibilities in these transactions. Key terms such as 'seller second' and wraparound financing will also be defined.