Archive for April, 2010

Frequently Asked Questions About Seller Financing, Part 1

April 28th, 2010

What is seller financing?

This is where the seller agrees to be paid all or part of their equity plus interest over time from the buyer.  It’s an installment sale where the buyer usually makes monthly payments to the seller, while the buyer gets the use of the property.  Once the buyer pays the seller in full the buyer receives the deed to the property.

What are other names for “seller financing”?

Other terms for seller financing include Owner Financing, Contract for Deed, Purchase-Money Mortgage, Real Estate Contract, Land Contract, Installment Contract, Conditional Sales Contract, and Bond for Deed.  99% of seller financing in New Mexico is facilitated by using a real estate contract.

Is seller financing the same as “Lease to Own”?

No.  The buyer actually purchases the property when he or she enters into a real estate contract.  The buyer receives the benefit of any appreciation to the property.  The buyer gets to deduct the interest they pay to the seller on their income tax, as well as property taxes.

How often do people sell property using seller financing?

In the greater Albuquerque there are approximately 4000 to 5000 transactions a year using seller financing.  There is approximately the same number of seller financing transactions in the rest of the state every year.

Why would a property owner use seller financing when selling real estate?

There are a variety of reasons.  Some see it as an investment.  Some sellers feel comfortable having properties they are familiar with as collateral and receiving a higher return or interest rate than they can get with CD’s, bonds, or treasury notes.  They enjoy receiving monthly payments.  Some sellers perceive the risk as less than that of the stock market.  They also can spread any capital gains realized over the life of the real estate contract.  Seller financing is also used when the property is nonconforming and conventional financing cannot be obtained.

Why would a buyer want to purchase on a real estate contract?

Some reasons a buyer would want to purchase property on a REC is that it is an easier process of purchasing property than securing a mortgage; the buyer doesn’t have to pay for points or appraisals; the buyer might have little or no credit; or the buyer might have just made a job change.  A buyer might also only want to put 10% down on, let’s say, a commercial property where if they tried to get bank financing they would have to put down 20%.