Seller financing, also known as owner financing, is a method of buying or selling a property in which the seller provides financing to the buyer. While seller financing can be used in any industry that involves the sale of a property, it is most commonly used in the real estate industry.
Within the real estate industry, seller financing is most commonly used in the following sectors:
- Residential real estate: Utilized in the sale of residential properties, particularly in cases where the buyer has difficulty obtaining a traditional mortgage.
- Commercial real estate: Seller financing is also used in the sale of commercial properties, particularly smaller properties that may not qualify for traditional financing.
- Land sales: Commonly used in the sale of raw land or undeveloped properties, as these types of properties may not qualify for traditional financing.
- Mobile homes: Seller financing is commonly used in the sale of mobile homes, particularly in cases where the buyer cannot obtain a traditional mortgage.
Why do sellers do this? Sometimes it is what it takes to get the deal done. Also, there are some tax deferral benefits as the return of capital vs. the gain on the sale are treated separately and the gain on the sale is taxed as you collect principal payments / down payment. Note, you may be able to sell the loan in order to get the cash up front.
The interest earned over the life of the loan will be taxed as regular income and that is an additional income stream the seller would not normally have. You can sort of be like a bank. There is the risk of default and in that case you are out of luck on uncollected payments. This means a long and painful foreclosure process.
Buyers do this because they may not want to go through a traditional lender or can't and don't have enough money to buy the property outright.
Overall, seller financing can be used in any industry that involves the sale of a property, but it is most commonly used in the real estate industry, particularly in cases where traditional financing is difficult to obtain or for properties that do not qualify for traditional financing.
Article found in Real Estate.
