Seller Financing Terms: A Wholesaler's Guide
Seller financing is when the property seller acts as the lender, allowing the buyer to make payments directly to them instead of a bank. For wholesalers, understanding seller financing terms expands your toolkit by letting you structure deals for buyers who can't get traditional financing and sellers who want ongoing income.
Down payment: The buyer's initial cash payment. In seller-financed deals, down payments typically range from 5-20% of the purchase price. A higher down payment protects the seller (more equity means the buyer is less likely to default) and gives the buyer a lower monthly payment. Most sellers want at least 10% down to feel secure.
Interest rate: Seller-financed rates are typically 2-4% above conventional mortgage rates. If conventional rates are 7%, seller financing rates of 8-11% are common. The higher rate compensates the seller for the additional risk of lending to a buyer who couldn't get bank financing. The rate must comply with state usury laws which set maximum allowable rates.
Amortization period: How long the payment schedule is calculated over. A 30-year amortization produces the lowest monthly payment. A 15-year amortization has higher payments but faster payoff. Most seller-financed deals use 20-30 year amortization.
Balloon payment: A lump-sum payment due at a specified date, usually 3-7 years after closing. The loan amortizes as if it were a 30-year loan, but the remaining balance is due in full at the balloon date. This protects the seller from being locked into a 30-year note. The buyer is expected to refinance into a conventional loan before the balloon date.
Due-on-sale clause: Specifies whether the buyer can sell the property to someone else while the seller-financed note is still outstanding. Sellers typically include this clause to prevent the buyer from flipping the property without paying off the note.
Late payment terms: Define what happens when a payment is late. Standard terms include a grace period (10-15 days) and a late fee (5% of the monthly payment). The note should also specify default terms: how many missed payments trigger foreclosure proceedings.
Prepayment penalty: Whether the buyer can pay off the loan early without penalty. Some sellers want to ensure they receive interest income for a minimum period and include a prepayment penalty for the first 1-3 years. Most buyer-friendly notes allow prepayment without penalty.
Insurance and taxes: The note should specify who pays property insurance and taxes, and whether an escrow account is required. Most seller-financed notes require the buyer to maintain insurance naming the seller as an additional insured. Taxes are typically paid by the buyer.
Recording: The promissory note and deed of trust (or mortgage, depending on the state) should be recorded with the county to establish the seller's lien position. This protects the seller's interest in the property.
Servicing: For larger portfolios or complex notes, a loan servicing company can collect payments, manage escrow, and handle communications. Servicing costs $15-$30/month per note and reduces the seller's management burden.
Dodd-Frank considerations: Federal regulations limit seller financing for residential properties occupied by the buyer. Sellers who finance more than 3 properties per year (or 1 if they didn't build the property) may need to comply with mortgage licensing requirements. These rules primarily affect investors who regularly sell with owner financing, not one-time sellers.
As a wholesaler, you can connect motivated sellers with buyer-investors who want seller financing. Your role is structuring the deal and your assignment fee comes from the spread between what the seller accepts and what the buyer agrees to pay.
This content is for informational purposes only and does not constitute legal, tax, or financial advice. Consult a qualified professional for guidance specific to your situation.
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