Seller Financing Terms to Negotiate Up Front
The buyer and seller must negotiate all the terms of a seller-financed transaction in an initial buy-sell agreement prepared by an experienced facilitator like American Seller Financing.
Commonly, sellers and buyers will sign a buy-sell agreement and believe that they have a deal, only to find during the preparation of the trust indenture or contract for deed that terms they overlooked at the start lead to uncomfortable disagreements that kill the transaction.
Essential Seller Financing Terms
The Basics - before negotiating price, make sure both parties are on the same page.
Parties Involved
Legal names of the buyer and seller – the buy-sell must disclose any party who will have any interest in the property.
For the seller – any person or entity with any controlling interest in the property. If the property is held in an LLC or other legal entity, locate the documents that give the signer the legal right to make decisions and sign documents pertaining to the property.
For the buyer – any person or entity who will be involved in the purchase. If the contract is not assignable, it is important to carefully consider the party or entity that will take ownership early in the transaction.
Assignability
Can the buyer assign the loan to another buyer after closing? Under what circumstances?
Often, a contract for deed or trust indenture will stipulate that the buyer cannot assign the contract without written seller approval.
Just like bank loans, the seller can assign their interest in the contract, meaning that the seller’s financial stake in the transaction is an asset that can be bought and sold.
Property Legal Description
A legal description of the real property being sold. This description can be found on the current deed and should be verified by your facilitator and title company, ensuring that all parties understand and agree upon it.
You must obtain a copy of the plat, certificate of survey, or other survey documents to confirm that the legal description accurately matches the property being sold.
Any known easements or other relevant property information should be disclosed before signing the buy-sell agreement to prevent conflicts later in the transaction.
Independent Investigation
The buyer’s inspection period prior to closing (if any).
The period of negotiation for unsatisfactory inspection items (if any).
Possession
The date from which the buyer will take possession of the property.
If there are any current leases on the property, the parties should agree on how security deposits and prorated rents will be distributed after closing.
In all states, the buyer is obligated to honor any active leases in place when they take ownership.
Price and Terms - creativity is key.
Purchase Price
Total purchase price of the property. Both parties should remember that seller financing allows for creative solutions that are not possible in other types of transactions. Use our Seller Financing negotiation calculator below to explore how adjusting principal amounts, interest rates, and terms can make an impossible transaction suddenly attractive to all parties.
Initial Down Payment
Initial down payment due at closing. Buyers and sellers can also be creative with installments to fine-tune the monthly payments.
For example:
A seller wants to sell a property for $500,000 and requires at least $150,000 down at closing.
A buyer currently has $100,000 available for the down payment but knows they can save an additional $50,000 over the next two years.
In most traditional transactions, this situation would present an irreconcilable difference. With seller financing, the seller could agree to:
-> A $100,000 down payment at closing, with a $400,000 loan at 5% interest, amortized over 30 years, resulting in a monthly payment of $2,147.29.
-> An additional installment of $50,000 due after 24 months (2 years).
The parties could choose to re-amortize the loan after the additional installment, reducing the loan amount and subsequently lowering the monthly payments, or maintain the same payments and amortization schedule.
The options in seller financing are endless. With a willing buyer and a willing seller, creativity can make a transaction positive for everyone.
Balance of the Loan and Payment Schedule
The loan balance is calculated by subtracting the down payment from the sales price.
The payment schedule specifies the due dates for payments, which can include options such as monthly payments, payments on the first of each month, or annual installments on January 1st.
Loan Amortization
The number of years it will take to fully pay off a loan if the buyer always makes the minimum payments.
The more years of amortization, the lower the payments.
For example, a $400,000 loan at 5% interest amortized over 30 years yields a monthly payment of $2,147.29.
In contrast, the same loan amortized over 20 years results in a monthly payment of $2,639.82.
Many seller financing transactions keep payments reasonable by requiring a balloon payment.
For example, the $400,000 loan at 5% interest could be amortized over 30 years, while requiring a balloon payment in 5 years. This keeps payments low at $2147.29, while the duration of loan is only 5 years.
Interest Rate
The interest rate that will be applied to the unpaid balance of the loan. Monthly interest is calculated based on the remaining loan balance and is paid along with the principal. For loans with a fixed payment, the interest portion of the payment decreases each month, while the principal portion in
creases.
For the finer points of negotiating seller finance transactions to account for interest over time.
Use our seller finance interest calculator to tweak loans to visualize interest over time.
Prepayment Penalty
A prepayment penalty is a fee charged if the buyer pays off the loan earlier than planned. It is essentially a penalty for paying back the borrowed money too quickly, causing the lender to miss out on expected interest payments.
When a seller is considering whether to offer seller financing, if the most important piece of the decision is collecting interest, a prepayment penalty can be a good idea.
If the seller is offering seller financing to get a better price for their property (to attract buyers who wouldn’t otherwise be interested), sometimes a prepayment penalty can dissuade buyers unnecessarily. Every transaction is different, and the motivations of all parties should be carefully considered before requiring a stiff prepayment penalty.
Often, a prepayment penalty is equal to all unpaid interest up to a specified date.
For example, if a seller is financing $400,000 at 6%, amortized over 30 years with a prepayment penalty for the first 5 years of all unpaid interest for the first 5 years, The buyer cannot refinance or make extra payments during the first 60 months of the loan without paying all interest that would have been paid during the first 5 years.
If the buyer paid off the loan principle after 1 year, they would owe the seller an additional $92,242.62
Use our Seller Finance Interest Calculator to fine-tune loans by visualizing interest over time.
Seller Financing Negotiation Payment Calculator
Seller Finance Payment Calculator
Little details that blow up if overlooked.
Escrow Fees
In seller-financed transactions, an Escrow Company—often a title company—handles the collection of monthly payments from the buyer. These payments usually include the amount owed to the seller, as well as prorated monthly property taxes and insurance. The escrow company distributes the funds to the seller and pays the tax and insurance bills when they are due.
Sellers and buyers must negotiate who will cover the escrow setup fee, typically ranging from $100 to $300, as well as the ongoing monthly escrow fee, which can range from $5 to $20 per month for the duration of the loan. Often escrow companies charge separate fees for each account they manage, such as a tax and insurance reserve escrow account.
Tax and Insurance reserves
To ensure that buyers remain current on tax and insurance payments, many contracts stipulate monthly prorated payments. The escrow company collects these payments and disburses the funds to cover bills as they come due.
Both contracts for deeds and trust indentures include terms that impose penalties for lapses in tax and insurance payments, which can result in default.
Forclosure - well-laid plans you hope to never need.
Grace Period And Penalty For Late Payments
How many days are given as a grace period for late payments?
What is the penalty for late payments (generally a dollar amount)?
Notice Of Breach - Timing and Penalty
When is a notice of breach sent out? (If the breach is due to nonpayment, how many days after the late payment grace period ends)
What does the buyer pay to cover the cost of sending the breach notice?
Cure Period For Breach
How long does the buyer have after the notice of breach is sent to cure the default? (For Example: Buyer has 45 days after the notice is mailed to cure the default).
Maintenance Of Property
specific requirements of the buyer to maintain the property.
Environmental Considerations
Stipulate if the contract prohibits hazardous substances allowed on the property during the contract period.
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