Seller Financing | What’s The Deal?

As interest rates climbed in 2023 and Central PA rents appear to have hit ceiling in June 2023, we observed that what buyers could pay for a property and achieve similar returns compared to the last several years has decreased.

Sales Volume:

With seller’s price expectations remaining the same, deal volume has compressed significantly, with sales at 1/3 of the average over last five years in Harrisburg region. Annual sales volume in the Harrisburg region has averaged $78.9 million over the past five years, but the recorded volume over the past year totaled just $24.9 million, which is the lowest sum over that five-year stretch.

Lancaster Annual sales volume has averaged $47.1 million over the past five years, and in the past 12 months specifically, $12.4 million worth of multifamily assets sold (1/4 Lower).

York Annual sales volume has averaged $33.4 million over the past five years, and the past 12 months specifically, $6.4 million worth of multifamily assets sold (1/5 Lower).


To resolve this issue, the market has taken up two solutions: assumable mortgages and seller financing.

Seller financing is becoming an increasingly popular option for those looking to create movement in this volatile market. Although there are some risks associated with this type of loan, it can be greatly beneficial for both buyers and sellers.

What is seller financing?

Seller financing is a type of loan in which the seller of a property acts as the lender. Owners can potentially sell at a higher prices, and they can also continue to receive similar cash flow, without the risks of maintaining the property or dealing with the day to day headaches of tenants.

There are several reasons why seller financing can generate a higher sales price. First, the seller is able to offer more favorable terms to the buyer, which may include a lower interest rate or a longer repayment period. This can make the property more affordable for the buyer, which typically leads to a higher sales price.

We recently closed a seller finance deal, where the seller choose to finance because it provided an attractive income stream, and had he received the cash in hand, there would have been no comparable asset to invest. With listing levels at 1/3-1/5 of what they have been on average over the last five years, there is even less choices for sellers, making an income stream the answer to their problem.

There are two ways to structure seller financing:

1. Sales Installment Agreement: A ‘Sales Installment Agreement’ is prepared and signed at a closing. All traditional closing items are done like checking title for property, and prorating all property taxes. A deed is prepared and signed by seller- but key difference is that the deed is held in escrow by attorney, pending complete payoff of property.

In this scenario, the buyer becomes the ‘Equitable owner’ while the seller is the ‘deeded owner’. Usually the Equitable owner has the full rights of ownership, including right to sell property in future

Seller has more protection from buyer default in this setup, as the deed does not record, so they seek remedy as allowed by SIA to take property back.

Tax Treatment- this can be recorded on seller’s taxes as a SIA and recognize the gain in part each year. This may help to decrease the amount of capital gain tax a seller pays if spread over time keeps the gains in lower tax bracket. No difference for buyer side taxes- they assume all tax treatment like depreciation and write off of interest payments.

2. Traditional Sale: Seller sells property just like they would if a bank was involved, only the seller then records a mortgage for the property, just like a bank would. The deed is transferred at closing.

Seller’s remedy in case of buyer default is the same as a bank would have in the case of a mortgage holder- foreclosure remedy.

Tax treatment- seller would recognize their gain on the sale of property just like you would with traditional sale. The interest they take in on financing would be treated just like interest income on their taxes. Buyer side tax no difference.

Generally Type 1 would be preferred by seller, and Type 2 by buyer, but circumstances involving tax or estate planning may lead a seller to lean towards Type 2, as well as the trust between the parties.

Who does it benefit?

Seller financing can be a great way for buyers to purchase a property without having to place the high 40-50% down payment required by many lenders. Although buyers may potentially have to pay a higher price, a lower down payment requirement and a lower interest rate could make up for it.

Sellers benefit because they can get a higher sales price, and they also may get potential tax benefits.

What are the risks?

One of the biggest risks associated with seller financing is the potential for the borrower to default on their loan. To mitigate this risk, it is important to carefully screen buyers and only offer financing to those who have an excellent track record as operators in the market and are well capitalized.

If the seller has a mortgage on the property, then they can’t finance it to you, and you won’t be able to take possession of the title. If the seller has a mortgage, a Master Lease Option (MLO) may be a better way to go.

Important Note: Some investors will do what is called a “wrap” or “subject to” financing. This is where a seller keeps the existing mortgage in place, and the new buyer makes the payments for the old owner. This can violate a “due on sale” clause that’s in the seller’s mortgage. This can leave buyer exposed legally, and if you are putting large sums of money into the property, why take this risk?

In Conclusion

Keep in mind that owner financing is not just for buyers who do not qualify for traditional financing. In fact, many times owner-financed deals are done with good, experienced, well capitalized multifamily buyers willing to pay a premium for the right property with the right financing.

Seller financing is becoming increasingly popular among both buyers and sellers in 2023 because of the ease of the transfer, and the ability to continue an income stream to seller when it is difficult to find replacement assets.

If you are interested in Seller financing, please reach out to our team, we would be pleased to assist you in the process or discuss if this is a good option for you to achieve your goal.


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