To most commercial property buyers, seller financing sounds like a fantastic idea. Instead of bringing in a third party such as a bank or building society, seller financing allows the seller and the buyer work out the financial details of the property transfer between them.
There are fewer fees, and it is not necessary to put a mortgage into place. All that’s needed is a meeting of the minds and a solid legal agreement, usually in the form of a promissory note. In a seller financed sale of property, the buyer and seller agree on basic issues such as the size of the down payment and the loan, the repayment period, the interest rate and the definition and consequences of default. Then, the buyer makes regular loan repayments to the seller rather than to a bank.
1. The buyer doesn’t have to be approved for a mortgage
In today’s tight-fisted market, it can be difficult to secure a mortgage loan from a bank. Banks are not supporting small businesses as consistently as they did before the recession. Mortgages for the purchase of commercial property are not guaranteed, even for business owners with good credit and solid business plans. An owner financed property sale takes the bank out of the deal. The buyer only needs to convince the seller of their credit-worthiness, and if they default on the direct loan, the seller can repossess the property.
2. The seller keeps the interest
When a bank finances a mortgage, of course the bank keeps the interest; that is how banks make money. When a seller finances their own property sale, then they get to keep the interest. That turns the sale of a piece of property into a long term investment that’s likely to have higher returns than stocks or bonds.
3. It facilitates the deal
With a seller financed property sale, the deal is most likely going to go through if both parties want it to succeed. A seller financed property sale is often faster and more reliable than a sale involving a bank mortgage, and it’s ideal for sellers who want to make a quick transfer of title and buyers who don’t want to deal with traditional mortgage lenders.
1. The seller will not be paid in a lump sum
The greatest disadvantage for sellers is that they will not receive the proceeds from the sale of the property all at once. The payments will be made over years or decades. However, this can be mitigated if the sellers are later able to sell the loan to a bank.
2. The seller must collect payments
Granting a loan always involves some level of risk, and if the buyer proves undependable, then the seller must take legal action to collect the payments that are owed or to reprocess the property. This will likely be time consuming, expensive and stressful.
3. Solicitor’s fees will add some cost
Because each owner financed property sale is different, it’s important for both the buyer and the seller to have good legal representation as they work through the details. While seller financed property sales eliminate bank fees, they may involve increased legal fees.