Seller Financing: 8 Types

Seller financing is very powerful because both the buyer and seller can control all aspects of the transaction. Seller financing is available in virtually all circumstances. All options for seller financing are limited to two main categories: financing after closing and financing prior to closing.

After closing, the following four types of financing are available:

1. Clear and Free Financing A seller can own a property “free-and-clear” without any liens or encumbrances. This situation allows the seller and buyer to agree to any terms that they wish to make the deal work.

2. Equity-only Financing This type of financing allows the seller to only finance their equity in a property. The buyer must find new financing to eliminate all liens and encumbrances. The seller can then finance equity in the property.

3. Wrap Financing – Also known as “subject too” or “blanket financing. This is where the buyer acquires the property “subject” to the existing mortgage. The seller will make mortgage payments to the original lender, while the buyer will be responsible for paying the mortgage.

4. Combo seller financing – This financing option combines the financing options #2 and #3. A buyer can wrap the underlying mortgage to finance the seller’s equity.

These are the next four types of seller financing that occur prior to closing

Purchase Option The buyer can give money to the seller (option payments) to buy the property at a certain price (option price), and within a specified time (option period). This is called a “purchase option”. This is seller financing. The seller is still responsible for the property and any payments, until the buyer buys the property (exercices their option to buy) or expires.

6. Extended Closing– An extended closing is similar in nature to a purchase option, except that it is performed with a Real Estate Purchase Contract. The extended closing extends the closing deadline or puts it into the future much more than for a normal real estate purchase.

7. Open ended Closing-The REPC also allows for an open-ended closing, but the closing deadline is tied with a future event (e.g., the completion of an addition/remodel). The closing occurs only after the future event is over or completed.

8. Seller Partnerships – The seller can either sell the property or retain ownership. The seller will contribute the property and possibly some capital in either case. The buyer would provide the knowledge and capital, as well as the effort to increase or create the property’s value. The buyer would either re-finance the property or sell it to a third party. The seller would receive his capital and equity contribution, as well as an agreed partnership share of any additional profits.

These 8 types of seller financing are great because both buyer and seller can benefit from each other. These seller financing options allow a seller to get a buyer to improve their property and do all the repair work at no cost to the buyer. The buyer is also excited about the project! In my next article, I will explain how this works.


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