In a typical real estate transaction, the buyer gets a loan from a bank to finance the purchase of the home and the seller gets the proceeds from the sale at the time of closing in a lump sum. But with seller financing, rather than getting a lump sum at closing, the seller agrees to transfer title to the property to the buyer in exchange for a promissory note and a security interest in the property.
The promissory note states the interest rate, the repayment schedule and other terms and conditions. The buyer makes monthly payments to the seller rather than to a bank.
The term of the loan can be for any length of time agreed to by both parties.
Seller financing can result in a faster closing and the possibility of a higher sales price since no appraisal is needed. There can also be potential tax savings for the seller by deferring capital gains tax – and both buyer and seller can save on closing costs.
That said, in order to protect everyone’s interests, all related documents should be professionally drafted and both parties should be represented by an attorney.