Seller financing is a transaction where the seller agrees to receive regular payments, typically monthly from the buyer instead of a lump sum payment until the agreed upon amount is paid. As in any normal sale, a down payment is negotiated between the parties. It is a simply a case of seller agreeing to lend money to the buyer to purchase and close on the property. The seller transfers the ownership of the property to the buyer at the closing. In return the seller receives a mortgage, entitling him to a schedule of payments and a lien on the property until the loan is repaid. It is also called owner financing, or owner carry-back.

 Seller financing differs from conventional loans. The seller does not give the buyer cash to purchase the home as a lender does. The seller instead extends credit to the buyer against the purchase price of the home and the buyer executed a promissory note and trust deed (or mortgage) in favor of the seller. The buyer will generally be required to give the seller a down payment, make monthly installments on the loan and have to pay interest.

From a seller’s point of view, seller financing will increase the pool of potential buyers. There are many buyers who look only for properties offering seller financing. The deal can be closed quickly as the formalities to be completed are few. If one or more payments are received on the sale of a property after the tax year in which the sale occurred, the IRS will treat such a sale as an installment sale and will tax only the percentage gain reflected by the payments received in that year and not the entire gain. Seller financing spreads the gain over time and helps reduce taxes as taxes are paid as payments are received. Spreading a large gain over time can prevent being bumped into a higher tax bracket.

Pros

 There are no liens or judgments to contend with, no homeowners or tenants to evict, no back taxes due, and accessing the home for evaluation or inspections is easy. All liens against the home are removed once it becomes an REO, and taxes are paid. The fact that the home has officially changed hands from the homeowner to the lender means that the lender has done all the work. With all the legal work completed, the complications of buying and the associated risks are removed.

 Most bank owned property are below market value. Lower down payments, better interest rates, reduced closing costs and a discount off the market value of the property, taken all together, make for a better than average home purchase. A properly structured deal will give you a low down payment, low monthly payments, and a low total price. For those looking to save money buying their first home, this is usually the way to go.

 Unlike properties at foreclosure auction, REOs can be inspected prior to contract, and are listed with real estate agents.

 While many foreclosures are often in deplorable condition, REOs are typically restored to at least a readily salable condition by the lending bank. The lender that owns the property will often offer financing with better deals than they would offer on traditional properties and will often provide an allowance for certain repairs.

 You can save money in your title search if you use the same title company that the lender used during foreclosure. REOs will often times include appliances

 Cons

 The biggest disadvantage of a Bank owned property is that you will not know much about the past history of the home. Another big disadvantage is that most Bank owned properties are not in good condition. You may need to call the gas, water & electric companies to get them turned on & also you will have to pay for all repairs.