How does Seller Financing Work?

Best way to think about it is that you become the Bank. It does mean that you won’t get the full money amount today, but it means you can get a higher sales price on vacant land, plus you will receive interest just like a bank does.

You do have to have a lawyer draw up the paperwork, but it’s a pretty standard and minimal fee.

So let’s use an example I personally did a few years ago.

Let’s say you have some land you’re selling for $70,000. The main problem with land is that it someone usually has to have the cash in full to purchase it. Typically a buyer, when they have a large amount of cash wants to negotiate a discount because… well they’re putting out a large amount of cash. There are also only very limited to non-existent financing options for vacant land. I’ve only known a couple banks that will do so, and it comes with a lot of hoops to jump through for the buyer. The reason why is because most mortgages are primarily secured with the structure, not the land. In foreclosure, it’s hard enough to liquidate a house… let alone vacant land which much fewer people want.

So offering seller financing can greatly expand the buyer pool with the tradeoff of delaying your payout… but typically guaranteeing a higher return if you’re patient.

Basically during negotiations you work out with the buyer a few main criteria:

Down Payment
Term (length of the loan)
Interest Rate
Optional: If short term, then balloon payment terms

For a conventional loan everyone knows and loves, that looks like: 20% down, 30 year term, 7% interest rate. No balloon because the principal gets paid in full by the end of the term.

Seller financing though, you can structure terms much, much differently. Kinda whatever you want, within limits of course. So you can do: 30% down, 10% interest, 5 year term (amortized to 30 years), Balance due as a balloon payment at the end of the 5 year term. You could also do 0% down, though that’s usually very high risk from a buyer default standpoint.

You’re probably asking, “Why would anyone agree to do that?” and the answer is that seller financing appeals on properties like vacant land that are problematic to finance, and the end goal most people have with vacant land isn’t to hold it for 30 years as it sits… it’s to build a home on it. So this allows people to purchase a lot with a lot less cash out of pocket, make relatively small payments (payments in the above are amortized / calculated to 30 years), and they can take control of the property, get a builder, get permits, build a home, and then when the home is built roll both the vacant land loan and the home construction loan into one combined loan… at which point you are usually paid in full.

The reason you want a lawyer involved writing it up is because you really need a full, complete, and legal mortgage and note, properly filed at the county courthouse just like if you were Bank of America. That way if something goes sideways and the buyer defaults on the loan, you would be able to foreclose. There are also limits and such on interest and structure of the loan, and I’m pretty sure Florida doesn’t allow early payoff penalties though you 100% need to speak with a lawyer about that. The few hundred bucks a lawyer charges to write it up is worth the peace of mind, and typically this is handled after you’re under contract with the buyer.

The payout is also typically higher than if you were paid with full asking price, because the majority of the monthly payments made are interest. With the above amount, It’d look like this:

Here’s a calculator where you can see
https://www.fmbanknym.com/mortgage-balloon-payment-calculator
Purchase Price: 70,000
Down Payment: 21,000
Interest 10%
Monthly Payment: 430.02
Total Interest Paid of 5 years: $24,121.81
Payoff Amount at 5 years: around $47,750
Total Paid if it goes to 5 year term: around $94,000

Obviously with this buyer is going to attempt to negotiate terms. The other thing to know is this structure motivates many buyers to pay off the loan faster, or get the home built asap which again is fine because we’re happy with our original sales price.

The only real downside is you don’t get a large amount of cash NOW, but waiting 10-60 months isn’t bad and those monthly checks are nice. Plus a common tactic is to have the down payment cover whatever expenses you have in the property (like say what was laid out for the tax auction price). That way everything else is gravy. A truly motivated buyer can usually get the house built in 6ish – 10ish months usually.