What is Seller Financing?
Seller Financing is a term used to describe the an alternative form of financing in which a seller provides financing for a real estate transaction. Seller Financing can be offered for a variety of reasons: to accommodate a buyer who has difficulty obtaining a loan due to financial or regulatory constraints, to create a retirement vehicle for a homeowner who would like to turn their existing home into a financial instrument, or to avoid mortgage contingencies.
Seller Financing is unique to a traditional bank/lender structured loan because there is not transfer of cash, but rather a transfer of credit against the purchase price of the home. The seller retains title of the home until such time as the buyer has paid the entire agreed upon amount, per the terms of the agreement.
Like a traditional loan, necessary paperwork is prepared by the title or settlement agent, after the terms are worked out between the buyer and seller.
You may obtain a copy of the IRS's Publication 537, "Installment Sales" by calling (800) TAX-FORM, available online at: www.irs.gov/formspubs
There are inherent tax breaks for sellers that should be discussed with legal counsel and your accountant to appreciate the benefits and potential consequences of a Seller Financing arrangement. Additionally, seller's should be aware that they face the same risks that any lender would face in a mortgage loan situation and should be adequately advised and informed before undertaking such an endeavor; strength of the market and credit-worthiness are two among many considerations that should go into evaluating the risk of lending.