In our real estate deals you can often come across one or more :
- A Down Payment is typically Paid Upfront, Non-Refundable and is Credited towards the Purchase Price.
- A Deposit is Paid Upfront, Refundable and credited towards the Purchase Price.
- A Fee (usually an Option Fee) is Paid Upfront, Non-refundable and is not Credited towards the Purchase Price.
- A Commission (usually an Agent’s compensation) is Paid at Closing and Out of the Sale’s Proceeds of which it’s typically a percentage; since August 17, 2024, Sellers and Buyers pay for each other’s representation, while Dual-agency (Agent working for both parties) is illegal in many states.
Our deals are always tailored to the sellers’ and buyers’ needs, goals, and expectations, so these are not rules, but rather guidelines that must be verified and confirmed before being relied upon.
In some deals, or in some stages of them, it’s better to include a down payment, in others a deposit or a fee. A commission is likely present if an agent or broker is involved.
Make sure you know the specific use of any term and in particular of the ones above to avoid misunderstandings and disappointment, as we want every aspect of our deal to be clear before money exchanges hands.
Clarity makes good deals, and good deals are made in clarity.
It’s a Purchase & Sale agreement where the transaction is:
- partially in cash or and the rest is financed by the Seller or
- financed by the Seller entirely
In this type of transaction the Seller typically receives regular monthly payments (installments) in addition to a possible, initial downpayment that is credited towards the purchase price. There can also be no downpayment, that’s when the whole amount is financed.
It’s similar to a regular bank mortgage loan, and it’s equally secured by the property that acts as collateral and security for the lender. The Seller can be described as “the bank”; despite different rules, generally more favorable than for banks and other large lenders, it holds a very similar position in a Seller Financed deal.
The Seller carries a note for the installments, which can usually be easily sold for cash if the Seller opts to, and a mortgage for security that allows to force the sale of the property in case of breach of contract. The note can be recorded to notify the general public of the existence of a secured loan on the property, to put the lender/seller in a strong position.
Proxima Investors are the financed as Buyers and typically we simultaneously sell on Seller Financing to our end Buyers also. We extend credit in a mirrored deal, or we sell on a variation of lease-option, depending on their Buyer. Depending on the circumstances and what appears to be the overall best type of deal, we may lease, sell conventionally, hold or whatever seems best.
Seller-Financed sales are executory contracts that have a variable duration; we classify them as short-term (5 to 7 years), medium-term (7 to 15 years), and long-term (15 to 30 years or longer). Most Seller-Financed deals that we’re involved in as Proxima Investors, are short-term.
Like many other Deals on Terms, Seller Financing offers several, strong Tax advantages that a Seller can and should evaluate with their Tax Advisor as each Seller has a unique tax position. We strongly recommend a thorough analysis to make the most of the tax benefits that Seller Financing offers to Home Sellers.
Seller Financing is particularly popular in periods of time when interest rates are particularly high, like in the late 1970s and early 1980s, and more recently, 2023/2024, when rate hikes are needed to tame inflation.
In such economies, the amount of interest that needs to be paid is a great incentive for Home Sellers who want to sell fast, easy and cash in the most, and certainly more than in a conventional sale that involves an institutional lender or bank.
Seller Financing is also called in many other ways including Owner Financing, Purchase Money Mortgages, Owner Carry and many similar variations without significant variation in meaning.