Seller financing

There is a secondary market for seller financed debt instruments. Many companies and investors look to purchase properly structured debt instruments as investments.

In the United States, seller financing has emerged as a way for people with poor credit a path toward home ownership following stricter regulations placed on mortgage lending following the subprime crisis of 2008. Unlike a regular mortgage, in which the buyer gets the legal title to the house, the buyer in seller financing does not receive the legal title until they have fully paid off the purchase price of the house. This means that if a buyer misses a payment, they can be evicted and lose all money and interest put into the house. In addition, the buyer is often responsible for repairs, taxes and insurance, meaning that they have the responsibilities of being a homeowner without the rights of actually owning the property. Seller financing contracts are subject to fewer consumer protections than mortgage loans in most states.

While seller financing can provide a unique way for people with low credit scores to obtain a path to home ownership, they are considered predatory by groups such as the Center for American Progress. In addition, some investment firms have shied away from getting involved with seller financing out of fear for their reputations. A 2012 study of seller financing contracts in Maverick County, Texas found that less than 20% of people who signed such a contract ever came to fully own the home.[1]

Seller/buyer benefits:

• Both the buyer and the seller can make substantial savings in closing costs.
• They can negotiate interest rate, repayment schedule, and other conditions of the loan.
• The buyer can request special conditions for the purchase, such as inclusion of household appliances.
• The borrower does not have to qualify with a loan underwriter.
• There are no PMI insurance premiums unless negotiated.
• The seller can receive a higher yield on his/her investment by receiving equity with interest.
• The seller could negotiate a higher interest rate.
• The seller could negotiate a higher selling price.
• The property could be sold "as is" so there will be no need for repairs.
• The seller could choose which security documents (mortgage, deed of trust, land sales document, etc.) to best secure his/her interest until the loan is paid.
• If the property sells for a substantial profit, the seller can spread the resulting capital gain over multiple years, usually reducing the overall tax burden by turning the transaction into an installment sale.

• The buyer could pay the loan in full but still not receive title due to other encumbrances not divulged by, or unknown to the seller.
• The buyer could make payments faithfully, but the seller might not make payments on any senior financing that may be in place, thus subjecting the property to foreclosure.
• The buyer might not have the protection of a home inspection, mortgage insurance, or an appraisal to ensure that he/she is not paying too much for the property.
• The seller might not get the buyer’s full credit or employment picture, which could make foreclosure more likely.
• Depending upon the security instrument that was used, foreclosure could take up to a year.
• The seller could agree to a small down payment from the buyer to assist in the sale, only to have the buyer abandon the property because of the minimal investment that was at stake.

• Hire purchase / installment plan
• In-house lending
• Leasing
• Rent to own
• Closed-end leasing
• Mortgage