Are you looking to finance your business? Or do you want to pay for a property over time rather than all at once? Seller financing is just what you’re looking for.

Thanks to this financing option, you don’t have to worry about getting a bank loan to purchase a property. Now, you can sign a loan agreement with the land seller. Keep reading to learn what seller financing is and how it works.

Key Takeaways

• There are certain risks involved when you finance your home. An example is when a homebuyer stops paying, the seller, in this case, can incur legal fees.
• In a seller-financed property, the buyer and seller negotiate and agree on the terms and conditions.
• In real estate, seller financing is also known as owner financing.

What is Seller Financing in Nigeria?

In the simplest terms, seller financing is a loan the seller provides to the buyer. It is a real estate agreement in which the buyer signs a loan agreement with the seller.

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Another name for this financing option is owner financing or a mortgage for purchasing money. As a seller, you must know strategies on how to sell and close deals. Knowing this would help you avoid financial loss.

How Does Seller Financing Work?

Seller financing requires the buyer to pay monthly or installmentally. However, this depends on the agreed terms and conditions. Also, the buyer is required to pay an interest rate depending on what was agreed upon.

The payment timeframe doesn’t end until the loan is fully paid. Since financial institutions are not involved in this process, the seller can access the financial statements, credit reports, and other land documents just like the financial institutions do.

Here’s an Example

A buyer and seller agree on a purchase price of 500,000 naira, with the seller requesting a 10% down payment of 50,000 naira.

The seller then finances the remaining balance at a 5% interest rate over six years. Depending on the agreement, seller financing may cover most or only part of the purchase price.

The arrangement may also include a balloon payment or a lump sum due at the end of the financing term. With a balloon payment, the buyer can make lower payments initially and settle the balance with a single large payment later.

Types of Seller Financing Arrangements

There are different types of seller financing agreements and having an idea of these agreements can help you understand your options when buying land in Nigeria.

• Assumable mortgage
• Rent-to-own agreement
• Land contract

1 . Assumable Mortgage

This type of mortgage program allows buyers to take over the seller’s existing loan. In an assumable mortgage, the interest rate and payment period remain the same. For instance, if a 20-year mortgage is 5 years old, the buyer still has 15 years to pay off the loan.

2. Rent to Own Agreement

This is also called a lease option agreement. It allows you to rent the property and still have a part of your rent fee put into your eventual down payment.

3. Land Contract

It is also known as a contract for deed. This is an owner-financing arrangement where the property title remains in the seller’s name. The property title will be changed to the buyer’s name when the loan is paid in full.

What Are The Pros and Cons of  Seller Financing?

Before trying out this financing option, you should have an idea of its pros and cons. Below are the pros and cons you need to know.

Pros

• Selling and buying properties can be much easier and faster using seller financing. This is because the agreement made is more flexible and personal.
• It enables more flexibility in the agreement than a bank will allow. That is, both the buyer and seller can negotiate and make a counteroffer on the property.
• The buyer does not need to be qualified for a bank loan before engaging in seller finance.

Cons

• As a seller, you need to be financially stable before entering seller financing. Delays in payment can affect your plans for other business transactions.
• Although seller financing could be flexible and faster, it could also be more expensive. Sellers can decide to increase their interest rate and buying prices.
• Seller financing could be risky when a buyer decides to default. If a buyer no longer fulfills their financial obligations, the business will be foreclosed, meaning the seller will either have to find a new buyer or restore the business.
• Some sellers will require balloon payments during the loan agreement.

Terms Related to Seller Financing

• Promissory note
• Closing costs
• Balloon loan
• Due on sales

1 . Promissory Note

It is a document detailing the terms and conditions of the sale. It is the foundation of the agreement between the buyer and the seller.

2. Closing Cost

These are fees paid at the end of the sales. This fee is either paid by the seller or buyer. It includes; record fillings, commissions and taxes.

3. Balloon Loan

In seller financing, a balloon payment is an inflated one-off payment to settle a loan that was not fully cleared over its term.

4. Due On Sales

This is a loan section that requires borrowers to pay the lenders when the property is sold.

Final Thoughts

Seller financing has made it easier for property buyers. These buyers can now purchase properties and pay monthly or installmentally, depending on the promissory note.

This alternative lending arrangement helps prospective home buyers to become homeowners. Though seller financing can be a cost effective way to buy and sell business, it comes with several risks.

Frequently Asked Questions

1 . Is Seller Financing a Good Idea?

Yes, it is a good idea. This financing option is for buyers who don’t have the financial ability to purchase a property at once.

2. Who Pays the Taxes and Insurance in Seller Financing?

The buyers are the ones that pay for taxes and insurance in seller finances. These fees are usually included in the monthly payments.

3. What Is the Typical Interest Rate and Loan Term for Seller Financing?

The interest rate and terms depend on the agreement between the buyer and seller. However, it is common for seller financing to have a higher interest rate than traditional banks.