Because both the buyer and the seller have complete control over the terms of the transaction, seller financing is extremely effective. This indicates that applications for seller financing are virtually limitless. However, there are only two main categories that can be applied to seller financing: financing both prior to and following the closing.
Following the closing, there are four types of financing:
1. Financing with Free and Clear Title: A property that is owned “free and clear” does not have any liens or other encumbrances attached to it. In this present circumstance the vender and the purchaser are allowed to make any terms they need to make an arrangement effective.
2. Equity Only Financing: In this type of financing, the seller only lends money against the property’s equity. To clear all of the seller’s liens and encumbrances, the buyer must obtain new financing. The merchant is then allowed to fund the value in the property.
3.Wrap Financing: This type of financing is also referred to as “subject to” or “blanket.” The buyer acquires the property “subject to” the existing mortgage in this scenario. The seller is responsible for paying the mortgage to the original lender, while the buyer is responsible for paying the mortgage to the seller.
4.Combo Seller Financing: This kind of financing is a combination of options 2 and 3 for financing. The buyer can finance the seller’s equity by “wrapping” the underlying mortgage.
Before the closing, the following four kinds of seller financing take place:
5.Purchase Option: A buyer has a “purchase option” whenever they give the seller money (an option payment) in exchange for the right to purchase the property at a certain price (an option price) and within a certain time frame (an option period). Because the seller remains liable for the property and any payments until either the buyer purchases the property (exercises their option to purchase) or the option expires, this is a form of seller financing.
6.Extended Closing: A real estate purchase contract (REPC) is used in an extended closing, which is similar to a purchase option. In the drawn out close the end cutoff time is broadened or placed into the future essentially farther than a regular land buy.
7.Open-ended Closing: The open-ended close is also done with the REPC, with the exception that the closing date is tied to a future event (like when an addition or remodel is finished). The closing takes place only after the future event has taken place or been finished.
8.Seller Partnerships: In a seller partnership, the seller has the option of selling the property or keeping ownership. In either scenario, the seller makes a contribution in the form of the property and possibly some capital. The property’s value would be created or increased by the buyer’s efforts, knowledge, and possibly some financial resources. After that, the buyer would either re-finance the property or sell it to a third party. The seller would receive his equity and capital contribution, in addition to an agreed-upon partnership share of the transaction’s additional profits.
The great thing about these eight kinds of seller financing is that each one can be used to the buyer’s and seller’s advantage.
