A seller financing addendum is utilized when the Seller is providing financing for part or all of the purchase of a residential property, for the benefit of the Buyer. The addendum will be added to the real estate contract and is previously agreed upon by the Buyer and Seller before signing. The Seller essentially provides the property, but the down payment responsibility may still be required to be paid by the Buyer. This allows the Buyer to pay on credit as time goes on if they cannot obtain appropriate financing on their own.
What to Include
The addendum should include the following:
- Buyer name and information
- Seller name and information
- Property Address
- Loan Amount
- Loan Type and Terms of Repayment (balloon, FHA, etc.)
- Down payment amount
- Proceed amount and source to the Buyer along with Buyer instructions once loan proceeds are received
- Responsible party for property taxes and insurance
- Clause requesting credit documentation of the Buyer
Why Use a Seller Financing Addendum?
Seller financing can have positive side effects for both the Buyer and the Seller. This can be a lucrative opportunity for a Buyer who cannot obtain a loan or qualify for a special Financing program.
From a Buyer’s perspective, it can provide the following positive outcomes:
- Less administrative process means easier to qualify.
- All aspects of the loan are negotiable.
- The interest rate has a better opportunity of being lower.
- The Buyer may not have to pledge all of their personal assets to be held for contingency (which occurs with traditional financing).
- Quicker and simpler closing process.
From a Seller’s perspective, it can provide the following positive outcomes, which serve as strong motivators:
- Provides continued source of income without having to own the property.
- Less administrative process for the sale of the house and closing.
- Seller has opportunity to sell the house for a premium market price and obtain higher revenue.
- Lower taxes to be paid due the sale being an installment residential sale. This means the Internal Revenue Service (IRS) will not tax the lump sum of the proceeds, only pieces of it.
- Better potential to sell the house “as is” without having to complete repairs.
What Happens If The Seller Fails to Get Financing?
If a Seller still has a mortgage, the financial institution (in some cases) can call the loan terms to be fulfilled, as the house cannot be sold without full payment provided to the bank. To avoid that, the Seller can still apply for financing. However, if the Seller fails to obtain financing, potentially renegotiating with the bank may prove useful. Otherwise, they may be able to try a Lease to Purchase option with the Buyer which does not require immediate financing by a bank.