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Scratching the surface on the seller-financing option

By Stacey L. Shea, Esq. - Otis and Bedingfield, LLC — 

With interest rates on the rise, buyers in many markets are having second thoughts about making purchases that involve traditional financing. These concerns have led to an increase in the number of sellers electing to “carry the note” for their buyer, essentially acting as the lender in the sale of their property or asset, utilizing a Seller-Financing option.

With Seller Financing, also known as “Owner Financing”, the same person or entity selling a piece of property also provides the funding of the loan for the buyer. In addition to the use of Seller Financing for real estate, this financing option can also be used for the purchase and sale of equipment, stock certificates, or membership interest in a company.

The Seller Financing structure can be a beneficial option for both buyers and sellers. Seller Financing transactions generally close in less time that traditional bank loans and can have certain tax benefits. However, Seller Financing can carry potential risks that should be carefully considered before entering into any agreement.

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When contemplating the use of Seller Financing in a real estate transaction, the seller must first be eligible to be a lender under current state and federal laws. This is particularly important when dealing with the sale and purchase of residential real estate. Use of a buyer/borrower’s primary residence as collateral for a loan triggers state and federal laws intended to protect consumers from unsavory and predatory lending practices. These laws control who can lend money to a buyer/borrower, as well as what types of disclosures need to be provided.

Once a determination has been made that a Seller is eligible to legally act as the lender in the transaction, the focus shifts to the terms of the loan and their enforceability. The terms will need to be properly and consistently documented to ensure that each party is aware of their respective rights and obligations under the applicable loan document. While there are many loan document templates available online that can serve as excellent references, these templates should in no way be the last stop before the closing of a Seller Financing transaction. Inexperienced and uninformed users of these templates commonly make critical errors that can have a negative impact on the rights of one or both parties.

If you are considering a transaction that involves Seller Financing, either as the buyer or seller, both parties should consult with attorneys experienced in these types of transactions.