Seller financing is a process in which the seller also provides loan arrangements to a buyer. This model is most often used with the purchase of real estate, but can also be utilized in other applications, such as the purchase of machinery or other equipment offered by a manufacturer. Sometimes referred to as a seller’s loan, this arrangement can often be helpful if the current rate of interest on the open market is high, and the buyer is not necessarily interested in obtaining a principal from the sale.
With most examples of seller financing, the seller agrees to allow the buyer to have full use of the purchased item in exchange for agreeing to pay for the item in a series of installment payments. Often, these payments are structured to occur on a monthly basis, and usually with the same amount due each month. In the case of the purchase of real estate, the seller may or may not require some type of deposit on the total amount of the purchase up front. When a deposit is necessary, it is often less than the deposit that a financial institution would require as part of approving the mortgage for the property.
There are several advantages to seller financing. For the seller, the process often makes it possible to dispose of property or other items without the need to wait for financing on the part of a bank or other type of financial institution. In return for extending the financing to the buyer, the seller creates a situation where a monthly revenue stream is created, which can be used to pay for general living expenses or any other budget item that the seller desires. In many countries, seller financing helps prevent the need to pay taxes on the total purchase price, since the seller only receives a portion of that price in any given calendar year.
Buyers also benefit from seller financing. The process is often less complicated and time-consuming than going through a bank or mortgage company. It is not unusual for the terms of the financing to also be more favorable for the buyer, in terms of the amount of the monthly installment payments, or the deposit that is put down at the beginning of the financing period. Once the buyer has honored all the terms related to the sale of the property or other item, he or she assumes full ownership and can make use of the asset in any way desired.
While seller financing does have some advantages for both the buyer and the seller, it is not always the ideal solution. Financing of this type should not be seen as a casual arrangement, and should be governed by a contract that details the rights and responsibilities of both parties. Failure to prepare a contract of this type can create serious issues later on in the business relationship, and lead to a great deal of time and expense in attempting to settle legal claims against the asset.