The Benefits and Risks of Seller Financing
Seller financing can be an incredible investment – as soon as a seller starts calculating the interest on their loan, it becomes clear why banks are the biggest businesses in the world.
Seller financing, like all investments, has risks. Understanding the risks and worst-case scenarios allows us to mitigate and minimize those risks.
Reliable Interest that doesnt depend on the markets.
Want to see how much you could earn from seller financing?
Use our interest calculator to quickly estimate your potential returns. Simply enter the loan amount, interest rate, and loan term, then click ‘Calculate Interest’.
Example:
- Loan Amount: $500,000
- Interest Rate: 6%
- Loan Term: 30 years
Result:
- Total Interest: $579,190.95
- Total Proceeds: $1,079,190.95
The first part of the loan is mostly interest - Strategy is key
When a seller decides to ‘carry a contract’ for a buyer, it is essential to understand how interest is distributed over the life of the loan. While monthly payments remain fixed, the initial years primarily consist of interest payments. As the loan progresses, a larger portion of each payment goes toward the principal balance. Use our Seller Financing Interest Calculator to see how the monthly interest payments you receive will change over time.
Seller financing offers endless possibilities.
By thinking outside the box, we can tailor deals to fit your unique circumstances. Whether you need flexibility with down payments, closing timelines, or monthly payments, seller financing can provide solutions.
Buyer has an insufficient down payment
Buyer has insufficient down payment:
One solution is a deferred down payment. The seller can agree to a lower initial down payment, with higher monthly payments. After a set period (e.g., two years), the buyer makes a lump sum payment to reduce the principal balance. This results in lower monthly payments for the remaining loan term.
Example:
- Purchase price: $500,000
- Down payment: $75,000
- Loan amount: $425,000
- Interest rate: 7%
- Loan term: 30 years
Initial monthly payment: $2,548.09
After 2 years:
- Lump sum payment: $75,000
- New loan balance: $339,240
- New monthly payment: $2,032.48
This structure can help buyers with limited upfront funds secure a property while managing their monthly payments.
Buyer needs to sell a home before closing on the property
The seller can offer short-term financing to give the buyer time to sell their home, ensuring they can close on the new property.
For example:
- Purchase price: $700,000
- Down payment: $100,000
- Loan amount: $600,000
- Loan term: 1 year (balloon payment)
Terms:
- The buyer can sell their current home within 1 year.
- If the buyer sells before the balloon payment is due, they can pay off the loan in full.
- If the buyer doesn’t sell, they must make the balloon payment.
This arrangement provides flexibility for the buyer while giving the seller assurance that the deal will close.
Buyer cannot meet the seller's required monthly payments but expects an increase in income
The parties can agree to a graduated payment plan, where the monthly payments start lower but increase each year. This allows future payments to make up for the lower payments at the beginning of the loan.
Seller only wants to finance for five years, but wants to have the option to extend the loan if desired in five years:
All parties could agree to a five year balloon payment, with the option to extend if a written agreement is signed within six months of the balloon payment due date.
Deferral of capital gains
Instead of realizing the entire capital gain in the year of sale, a contract for deed allows you to spread the recognition of these gains over the life of the contract. This means you only pay taxes on the portion of the gain in each year that corresponds to the payments received.
Installment Sale Reporting
The IRS allows you to report the sale as an installment sale, which can offer tax advantages. You report a portion of your gain each year based on the payments you receive, rather than paying the entire tax in the year of sale.
Potential For Lower Tax Rates
Spreading out the gains can potentially keep you in a lower tax bracket in any given year, as opposed to realizing all the gains in one year, which might push you into a higher tax bracket.
Risks of Seller Financing
Contract For Deed
Risks
Trust Indenture
Risks
Contract For Deed
Risks
For the seller, a contract for deed is the safest financing option. This is because a formal foreclosure process is not required if the buyer defaults on the contract.
The terms of a default are established upfront in the contract. If the buyer violates the terms of the agreement—such as defaulting on payments or allowing tax and insurance payments to lapse—the escrow agent is authorized to file the buyer’s pre-signed and notarized quitclaim deed, transferring full ownership back to the seller.
Trust Indenture
Risks
For a buyer, a trust indenture is the least risky form of financing. A warranty deed is filed in the buyer’s name at closing, and the trust indenture secures the loan for the seller.
If the buyer defaults on any terms of the agreement, the seller must follow a foreclosure process. These processes vary by state and agreement. For sellers, formal foreclosure tends to be more expensive and time-consuming compared to the process defined in a contract for deed.
Risk Of Property Damage
All parties should consider ‘worst case scenarios’ when deciding whether seller financing is the best option for their sale. For the seller of a home, the ‘worst case scenario’ would probably be foreclosing on the buyer and getting the property back damaged or destroyed. The best way to address this risk is to ensure that the buyer’s mandatory insurance policy names the seller as a ‘loss payee’ on the policy. This means that the escrow agent will notify the seller immediately of any lapse in insurance, at which point the seller could begin foreclosure proceedings.
Ensure that the buyer has 'skin in the game'
It is essential that the buyer’s down payment and monthly payments are sufficient to ensure that the buyer feels invested in the property, making it unlikely that they would walk away from the loan. Furthermore, the payments should adequately compensate the seller to justify the risk of seller financing.
You Have a buyer. You have a seller.
We put it all together.
» 2.5% facilitation fee,
» An option of $0 due at closing
We facilitate the entire transaction – providing the terms, contracts, and contacts to get your deal done right.
Seller Finance-Driven Listings
» 2.5% Listing Fee,
» An option of $0 due at closing
Our network of seller finance-driven listing agents understand the nuances of selling owner-financed properties. Selling for more, maximizing income, and presenting properties to qualified buyers.