Seller financing is a loan provided by the seller of a property or business to the purchaser of that property or business.
For example, Sally sells her retail center to Barbara for $1,400,000. Barbara makes a down payment of $300,000 and Sally provides a loan for the difference of $1,100,000. Note, that in this example, Sally has not received the full $1,400,000 of proceeds from the sale - she has received $300,000 in cash and will be paid the difference over time according to the details of her agreement with Barbara.
The reasons for seller financing are numerous. From a buyer’s perspective, they may not qualify for traditional financing, down payments and closing costs may be lower and terms may be tailored to individual circumstances. From the seller’s viewpoint, they may wish to receive cash flow from the loan or they may potentially recognize a higher sales price by offering financing, especially if the terms are more attractive than prevailing market rates and terms. Speed and ease may be an advantage for both parties compared to working with a traditional lender.
Drawbacks to the buyer may include a higher interest rate of less attractive loan terms, and a drawback to the seller may include not realizing the full sale proceeds until a later date than with an outright sale. Risks to both parties include the loan not being properly documented or other legal issues such as title encumbrances. Seller financing can also complicate a 1031 exchange, but can still be accomplished with careful planning and a skilled Qualified Intermediary.