Seller financing can be a powerful wealth-building strategy, but only when sellers understand how to structure the deal properly. In this episode, Attorney Joe Seagle shifts the focus away from the typical investor mindset and dives into what sellers need to know before agreeing to carry the note. He explains how seller financing works, why sellers effectively become the bank, and the importance of approaching the transaction with a lender’s mindset rather than just trying to close a deal.
Joe outlines the key components that determine whether a deal is safe or risky, including interest rates, down payments, buyer creditworthiness, and loan terms. He emphasizes the importance of due diligence by reviewing credit reports, tax returns, and financials, just like a traditional lender would. He also highlights common mistakes sellers make, such as accepting low down payments, below market interest rates, or failing to properly secure the loan, all of which can lead to significant financial exposure.
Beyond risk management, Joe explores the upside of seller financing, including generating steady income, deferring capital gains taxes, and even turning the note into a sellable asset. He also discusses advanced strategies like using trusts to hold the mortgage and avoid probate. If you are considering seller financing, this episode gives you the clarity and strategy needed to do it right.
👉 Watch the full episode of Trust This: Tactics & Strategies and use our Seller Financing Evaluator to review your deal before you sign: https://aspirelegal.com/wills-and-trusts-workshop-florida/
Transcript
Not everybody talks about this. Seller financing from the seller’s point of view. There have been countless books, videos, lectures, seminars, and workshops about seller financing from the buyer’s side of the transaction, usually from the investor’s perspective. Most of the time, it is an investor buying the property with seller financing.
Today, I want to talk about seller financing from the seller’s perspective, because we represent both sides depending on the transaction. Sometimes we represent the buyer, but other times we represent the seller. Let’s get into it and talk about seller financing from the seller’s point of view.
First, what is seller financing? It is also called a carry back mortgage or a seller held mortgage. This is when the seller owns the property free and clear and sells it to a buyer. Instead of receiving all of the money at closing, the seller receives some of it upfront and holds a promissory note and mortgage for the remaining balance.
The buyer makes payments over time, usually monthly, based on an agreed interest rate. In this situation, the seller becomes the bank. This is also sometimes called an installment sale agreement.
There are several pitfalls and unknowns for sellers because most people do not do this regularly. Buyers, especially investors, are often very experienced with seller financing because they use it frequently to acquire properties with little money down. Sellers, on the other hand, may only sell one home in their lifetime, and this may be their first experience with seller financing.
If you are selling property in Florida, there is typically a seller financing addendum that accompanies the contract. The commonly used FAR BAR “as is” contract includes a section where seller financing is indicated, and the addendum outlines the loan terms in detail.
You must carefully review and understand those terms. Buyers will often propose the lowest interest rate possible to improve their cash flow. That is expected. However, as the seller, you need to be cautious not to accept a rate that is too low.
In today’s market, traditional mortgage rates are typically between six and seven percent. As the seller, you may want to be in that range or slightly higher to account for the additional risk you are taking.
You also need to think like a lender. A bank would request a credit report, and so should you. You are allowed to request a credit score and full report. Ideally, you want to see a score above 600, preferably above 700, and even better above 800.
You should also request tax returns for the past couple of years to verify income, as well as bank statements and proof of funds. You need to ensure the buyer can afford both the down payment and the ongoing payments, even if the property is vacant.
The down payment is critical because it represents the buyer’s commitment to the deal. While banks may accept lower percentages, seller financing often requires fifteen to twenty percent down. This protects you in case the buyer defaults, especially since foreclosure can take time and you may be responsible for taxes, insurance, and maintenance during that period.
You also need to evaluate the terms of the loan. Buyers will want longer repayment periods to reduce monthly payments. While loans are often amortized over thirty years, sellers typically include a balloon payment in two, five, ten, or fifteen years so they are not tied to the loan long term.
Do not assume you have to accept unfavorable terms just to sell the property. Even in a buyer’s market, you should negotiate interest rates, down payments, and repayment terms carefully.
Seller financing also provides tax advantages. Instead of paying capital gains and depreciation recapture taxes in one year, you can spread them out over time. This can reduce your tax burden and provide steady income.
The mortgage and promissory note you hold are also valuable assets. They can be sold to investors. The better documented and structured your loan is, the more valuable it becomes. Factors like interest rate, borrower strength, and loan terms all impact that value.
You can increase the value of your note by setting a competitive interest rate and structuring longer-term payments. Some sellers also use adjustable rates tied to benchmarks like the prime rate or treasury rates to improve long-term returns.
If you are selling to an entity such as an LLC, you should require a personal guarantor. Otherwise, if the entity defaults, you may have limited recourse.
Proper documentation is essential. Do not rely solely on standard forms from title companies or documents prepared by the buyer. Work with an attorney to ensure your note and mortgage fully protect your interests.
From an estate planning perspective, you should also consider how the note will be handled if something happens to you. Holding the mortgage in a revocable living trust or a mortgage land trust can help avoid probate and ensure a smooth transfer to your beneficiaries.
Seller financing can be a great way to generate income and exit a property without the headaches of managing tenants. However, it requires careful planning, proper structuring, and thorough due diligence.
The most important thing is to think through all of these factors before signing the contract. Once you agree to terms, your options are limited. Take the time to evaluate the deal, understand the risks, and structure it correctly from the start.
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