What is Seller Financing?
Seller Financing (also called, “Owner Financing”) is where a seller plays bank and manages the Mortgage process with the buyer. This eliminates the need for the buyer or the home to qualify for a traditional bank loan. It’s a great alternative to Buying or Selling real estate.
Since traditional banks are not involved, the terms of the mortgage are negotiable. Hire a Realtor in the Columbia Gorge who understands seller financed transactions due to their increased risks.
Determine if Seller Financing Works
It’s important to know that seller financing only works if you own the property outright. If you have a loan on your property, there is likely a Due on Sale Clause. This will be triggered if the property is sold or transferred and will prompt full repayment of your loan immediately. Confirm with your lender.
If the property is 100% owned, determine if it is the best option. Generally, it’s more advantageous to go the traditional bank route. If the buyer’s financing or the home’s condition limits lending options, seller financing may be the next best alternative.
Generally, sellers in the Columbia Gorge are respectful to this kind of request.
How Seller Financing Works
Have both parties consider what they need financially out of the transaction. A seller may need a high down payment to purchase a new home, or may want passive income in their older years. A buyer may want to make a Balloon Payment or to save some money for a remodel at closing with a lower down payment. An online tool I use to run numbers is the Purchase Money Mortgage calculator or the BiggerPockets Calculator.
Using a Purchase & Sale Agreement (PSA), the parties will negotiate the terms. Once mutually accepted, follow the process of Buying a Home or Selling a Home to satisfy all Contingencies.
The Down Payment, interest rate, term, and default consequences will be drafted on a Promissory Note by the Escrow company. This will then be signed at closing and recorded with the county. A third party escrow collection company commonly used in the Columbia Gorge is AmeriTitle in Roseburg, OR.
Popular Areas of Seller Financing in The Columbia Gorge
In the Columbia Gorge, we find the most seller financed transactions in rural residential neighborhoods, commercial districts, and agricultural zones. Let me expand on these:
Rural Residential
The first is rural residential properties. Areas including but not limited to Appleton, Goldendale, Klickitat, High Prairie, Carson, Glenwood, and similar are all popular areas of seller financing. Rural neighborhoods in these areas tend to have more unfinanceable properties or demand creative financing solutions for remodels and rental investments. Part of this is due to gentrification, high housing costs, and limited supply.
Commercial
The next are commercial lots. Savvy business owners are creative and instead of paying higher interest rates with banks, a savvy business owner may look for ways to leverage other people’s money. This might be with business startup, where they sell the business before the balloon is due, but kept their entry and monthly costs low. Also, commercial lots are often popular for seller financing because they open the buyer market up to procure a faster sale, since not everyone is looking for commercial property. Popular areas include but are not limited to city centers like, Hood River, White Salmon, The Dalles, Stevenson, Lyle, and Mosier.
Farm & Agricultural
Lastly is farms or agricultural zones. There are a lot of moving parts on farms to produce an income, and the farmer(s) have a lot to do with the quality and the output. Farmers are often well connected members of the community and will use seller financing as a way to trade and purchase farms from one another to save on closing costs, Realtor fees, and to grow their business. They’re just as savvy as their commercial counterparts! Areas include but are not limited to agricultural areas such as Odell, Parkdale, Pine Grove, Dee, Husum, Trout Lake, and Goldendale, etc.
Advantages of Seller Financing for Sellers and Buyers
There are mutually beneficial advantages to seller financing for both the buyer and the seller.
Since traditional banks are not involved, neither are the requirements. This can be advantageous to a seller who has an unfinanceable property due to it’s condition or qualifications. Twice moved mobile homes and geodesic domes are often unfinanceable properties due to their qualifications. Skipping an appraisal can save a lot of time and cost. Also, any time going through banking application processes. In real estate, time is the destroyer of transactions more often than anything.
The down payment is another area where both buyers and sellers can both mutually benefit. Seller can request the amount of down-payment they want from a buyer depending on their financial goal. While a buyer can request to purchase a property with as little money down as a seller will allow!
Advantages to Sellers
Seller financing can be a way to earn interest on your asset in monthly installments. Almost like rental income, but without the hassle of being a landlord! Balloon payments can allow a seller to obtain the remainder of the balance all at once by a given date. Monthly or at the end of a given term, it’s up to you how you split it!
Due to the inherit risk for the seller, sellers can sometimes demand higher interest rates or purchase prices. Call it the price for the unique opportunity to a otherwise unable to purchase buyer. Otherwise, the seller would be left waiting for a cash buyer who may not be interested in paying all cash.
Advantages to Buyers
Like traditional banking, you can write a seller financed transaction like a 30 year Fixed Rate Mortgage. Now, a seller may not be interested in holding a mortgage for the entire 30 years, but with a 30 year Amortization Schedule with a balloon at the end of it, a buyer can get into the property with lower monthly payments until they can later refinance or sell the home for a profit. Whatever suits you best!
For the future real estate investors, if you are unable to obtain a bank loan because your Debt to Income Ratio is too high, think again. Remember that seller financing does not have any requirements. If you can show a seller you are qualified to make the payments, you can further leverage other people’s assets to make you money. This also works if you do not qualify for a regular loan and you want to use the property for your personal residence. Hey, maybe you’re waiting for an inheritance?
Additionally, in difficult markets where interest rates are high, a motivated seller may be interested to offer a competitive rate lower than what banks are offering. Allowing a buyer to refinance later when rates are better.
See: Market Updates for the latest trends and stats for the Columbia Gorge.
Disadvantages to Sellers
Mentioned eariler, sellers looking at seller financing must own their property outright as to avoid the due on sale clause. Unless of course their lender allows it! Call them to verify or review your loan documents. Generally, the answer is no.
Banks have requirements for a reason, and while it isn’t your responsibility to make the payments after you close on the property, it’s certinly expensive and time consuming to foreclose on one if you aren’t getting paid! Worse yet, when you obtain the property back, what condition might it be in?
Lastly, qualifying a buyer can be difficult, but by verifying their source of income, assets, and bank statements you can qualify buyers to your own comfort. Do your own due diligence here and be cautious.
Disadvantages to Buyers
When interest rates are good, going the seller financed route often means sellers will request higher interest rates. This is because lower rates create more financed buyers. If property is unfinanceable however, even lower rates may be available.
Sellers don’t often want to hold a mortgage for too long. Sometimes this is because they’re aging into retirement or they want their cash by a certain time of their lives. Be ready to refinance into a traditional bank mortgage, pay the balloon sum by the end of the term, sell the property, or make it financeable. It all depends on your plan with the property.
While a benefit to sellers, balloon payments are often the scariest part of a seller financed transaction. Thinking of how you will come up with a wad of cash should be intimidating! But if you plan accordingly, they can be used as strategic deadlines to build equity in a home.
For example, say you’re buying a home with a 3 or 5 year balloon payment. You put less money down and have a higher interest rate. Your plan is to remodel the home and get it financeable. From here you have two options: 1) Do a cash out refinance to a 30 year fixed rate mortgage. 2) Sell it for a hopefully a sweet profit and pay off the balance. Now we’re talking real estate in the Columbia Gorge!
When navigating down the seller financed route, keep in mind your credibility. You need to prove to the seller(s) you are a good borrower with their asset. The easiest way is to be one and to have good credit to showcase your ability to perform. When communicating with the sellers, be prompt and deliver any documents as requested.
Summary
Seller financing is a creative way to purchase property in the Columbia Gorge. Especially when rates are high or the property is unfinanceable. Now that you’ve read this article, you should know when, where, and how to identify opportunities for seller financing. While it’s recommended to get a traditional bank loan first if you can, seller financing can create beautiful opportunities in Real Estate that otherwise would not exist. Seller financing is not friendly for first time property buyers but instead recommended for seasoned individuals and investors, or the transitional seller who wants continual income as they age.
