The seller of a home does not have the cash to lend the buyer to purchase the home. Therefore they cannot lend them money. The seller does have something else of value to both the seller and the buyer and that is the equity in the home.
Seller financing is where the seller takes monthly payments for the equity they have in the home instead of a lump sum of cash. This helps the buyer in they do not need to go to a bank and “qualify” for a loan. They simply make payments to the seller for the equity. It helps the seller in several ways. First, if this is not a homestead home then the seller faces a large capital gains tax. Seller financing allows the seller to spread that tax out over several years vs all in one lump sum. Second, some sellers would be better served if they received the payments for the equity in monthly installments just like an annuity or a pension. This helps them with medical expenses, boosts their income for living expenses, or simply gives the seller more cash to spend on leisure activities.
Seller financing can also be used for estate planning purposes. Should the seller pass the financing documents can be written up in advance directing the buyer to pay the designated heirs the monthly payments instead of the original seller. If the seller has a concern about the heirs ability to handle receiving a lump sum for their inheritance this is a great way to provide the heirs with a monthly income instead of letting them blow the entire inheritance in one lump sum.
There is also a way to avoid probate all together for a seller. First, move the property into a trust. Then have the payments go to the trust rather than directly to the seller. The seller is the beneficiary of the trust while still living. Then upon death there is a substitution of beneficiary and the payments then go to the new beneficiary there by passing to the heirs without going through probate.
So how is the seller protected? Good question! The seller receives a Promissory Note and a Mortgage on the property, very much like a bank. Should the buyer stop making payments the agreement can be modified or in the most severe cases foreclosed. Basically the property the seller sold is the seller’s collateral to insure they receive the payment for their equity.
Who’s name is on the Deed? The buyer’s name goes on the deed. The seller’s name goes on the Note and Mortgage as the creditor.
So the next time someone asks you if you will “hold the note” or do “seller financing” think about the advantages selling your equity presents to you.