What Is a Seller-Financed Sale?

In a traditional real estate sale, the buyer obtains financing in the form of a mortgage through a bank or financial institution. As the name implies, seller financing entails the homeowner financing the sale instead of a bank or financial institution. The terms of a seller-financed sale are negotiated between the parties, offering more flexibility to both the buyer and the seller. Ultimately, however, seller financing works in much the same way as a mortgage. The buyer simply makes scheduled payments each month to the seller instead of to a financial institution. At the time of closing, the buyer receives title to the property; however, the seller retains a lien on the property until the debt is paid in full.

What Are the Potential Advantages of Seller Financing for Buyers and Sellers?

There are several potential advantages to seller financing for a buyer. To qualify for a traditional mortgage, the buyer must meet stringent requirements, such as showing an acceptable debt-to-income ratio, meeting a minimum credit score threshold, and coming up with an acceptable down payment. For some buyers, these requirements preclude them from achieving their dream of home ownership. When the seller agrees to provide the financing, the requirements are much more flexible. For example, a seller may be willing to overlook a less-than-stellar credit score if the buyer provides proof of sufficient income or offers to come up with a significant down payment. Seller financing also allows the buyer to negotiate favorable loan terms, such as the repayment period, interest rate, and closing costs.

A seller may also find the option to provide financing attractive for several reasons. The potential buyer pool can be significantly enlarged when a seller is willing to provide the financing. In addition, a seller can save on capital gains taxes over time and sell the property “as is” without having to invest in expensive repairs that might be required to pass inspection when the buyer is applying for a traditional mortgage.

Potential Pitfalls of Seller Financing

Although both the buyer and seller may be attracted to the prospect of a seller financing arrangement, there are potential pitfalls of which both parties should be aware. Working with an experienced attorney when negotiating a seller-financed sale can dramatically decrease the likelihood of encountering these pitfalls.

For a buyer, one of the most important possible hazards when entering into an owner-financed purchase is the lack of protections offered by a traditional mortgage loan. To obtain a mortgage, the financial institution will require a clear title search to ensure that there are no existing mortgages, liens, or other encumbrances that could cloud the buyer’s title to the property. The buyer may also pay a higher interest rate with a seller-financed purchase than would be available with a mortgage loan.

One of the biggest disadvantages for a seller is the lack of liquidity in a seller-financed sale. Instead of receiving the entire purchase price at the time of closing, the seller must agree to receive an agreed-upon down payment followed by monthly payments until the debt is paid in full. Sellers should also consider the increased risk of default that typically accompanies a seller-financed transaction. Buyers are frequently attracted to owner financing because they cannot meet the stringent eligibility requirements necessary to obtain a mortgage loan. While not always the case, a low credit score or a debt-to-income ratio that is too high for a mortgage may be a red flag that indicates the buyer cannot afford the monthly payments, leading to default. A seller who has entered into an owner-financing agreement can foreclose on the property; however, there are considerable expenses the seller will incur if foreclosure becomes necessary.

Seller Financing and Georgia Law

Sellers contemplating a seller-financed transaction should be aware that Georgia has incorporated the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008, commonly referred to as the SAFE Act, into Georgia law. The overall goal of the SAFE Act was to restrict the ability to make mortgages to those who are licensed by the state. Fortunately for the average seller, there is an exemption to the licensing requirements found in the SAFE Act. Georgia Code § 7-1-1001(8) provides an exemption for “Any natural person or the estate of or trust created by a natural person making a mortgage loan with his or her own funds for his or her own investment, including those natural persons or the estates of or trusts created by such natural persons who make a purchase money mortgage for financing sales of their own property.” As long as your home is not legally owned by an LLC, corporation, or other legal entity, the exemption allows you to provide financing without being a licensed broker.

Speak to an Experienced Georgia Seller Financing Attorney Today

If you are contemplating entering into a seller-financing sale in Georgia, contact an experienced Georgia seller financing agreement attorney to discuss how we can help you by calling 678-882-0830.