While the pandemic hit the real estate sector largely, it has picked up its pace and is back on the growth track. There has been evident growth in the demands for property, especially in India. Recovery policies and the impending tax burden on home buyers can however impact this demand and supply chain of real estate. This is where the need for an alternative which finances property buyers comes in picture.
When investing in real estate, there are two ways most of us opt for. We either mortgage the property or pay for it in cash. There is another way that not many of us are aware of. Seller Financing. It is as simple as it sounds. The seller finances the purchase. In other words, it is the one who holds the mortgage and acts as a lender for the buyer. As the buyer and seller mutually get into this agreement, these transactions bring numerous benefits to both and are quicker and cheaper than traditional lending options.
How seller financing works:
In its simplest form, when a seller agrees to sell a property to a buyer via seller financing, he agrees to take monthly payments for the same in exchange. After the down payment, the parties involved decide on the amount to be paid monthly. They negotiate how long the loan tenure would be, the down payment, the rate of interest, and other aspects. In this agreement, the buyers should insist on having the real estate title transferred to their name and that the sellers have their financing documents registered on the property as a mortgage lien to make sure that both the parties are protected. Local laws for seller financing vary everywhere. Make sure that the deal contracts are reviewed by legal experts to ensure there are no discrepancies.
Advantages for the seller:
This transaction usually works in the favour of the seller. Seller-financed transactions are generally faster and easier to process for both parties. The time taken for approval by banks and other legalities is saved, thus quickly selling properties. It also helps the seller to expand their market and sell properties on their own terms and conditions. These agreements are of shorter duration than conventional methods and usually last for 5-10 years. Sellers can also save money on taxes, choosing to pay the capital gains once a year.
Advantages for the buyer:
One of the biggest advantages of choosing this method is that buyers get to buy properties they want, even the seemingly unaffordable ones. Banks can’t dictate what a buyer can invest in or not. These deals are flexible and the buyer, in agreement with the seller, can decide on the tenure and rate of interest that suits their needs, instead of a one-size-fits formula for all. They can choose to pay off the mortgage amount in 12 months or 12 years.
Risks associated with seller financing:
Seller financing is a unique option that creates mutually beneficial opportunities in real estate, but, if not done right, can be a risky choice. A seller could face foreclosure and losses if the borrower fails to pay back the mortgage in the stipulated time frame. Make sure there is no existing mortgage on the property, as it can trigger the due on sale clause. If the seller insists on keeping the property title in their name when the payments are made the buyer can end up in situations where they lose out on both ownership of the property and any money they paid to the seller during the term of the seller financing.
While seller-financing is largely prevalent in the west, it is still in its nascent stages in India. At RGS Realty, we believe that owning a property is something that goes beyond traditional terms and conditions. If seller-financing picks up its wings in India, it would be a welcome move by a progressive real estate community in our country. To know more about who we are or what we do, visit www.rgsrealty.com