How to structure Seller financing?

[Rizki Setia]

Hi BP, 

I am purchasing $250K condo and the owner willing to give seller financing (the owner never done seller financing). 
what’s is best to structure owner financing? Is that same like financing to the bank (20 percent down and interest) or any better way? 

[Joe Villeneuve]

There are two types of sellers here:

1 A seller that thinks they are a bank, and thus charges high interest and a high DP.  These are greedy Sellers/  Walk past them...and keep on walking.

2 - A seller that understands how much money they are saving...and making by doing seller financing as opposed to traditional.  They save on taxes, closing costs, and more.  They make more money because they are adding the interest you pay to their total.

Example:  $100k sale

Option 1 - Traditional Sale
DP = 20% = $20k
Loan at 6%/30 years = MP = $480/month;  $5760/year
Total paid by buyer = $192,670.55 (PI + DP)
Total to Seller = $100,000.00 (minus taxes, closing costs, etc...)

Option 2 - Seller Financing
DP = 10% = $10k
Loan at 3%/30 years = MP = $337/month; $4044/year
Total paid by buyer = $131,421.96
Total to Seller = $131,421.96 (minus taxes, closing costs, etc...).  Taxes are far less because the seller isn't getting all of the money in one shot.  The closing costs are also far less since most of the closing costs come from the bank financing, of which there is none.

The biggest difference between traditional financing and seller financing is the description of what's happening...as it pertains to the money/cash movement:

1 - Traditional financing - The buyer of the property is "buying" (not borrowing) money from the bank. They get ALL of the cash needed to buy the property from the Seller.  The Buyer now owns the property and has a mortgage to pay for the cash used to buy the property, which includes what amounts to "late payment charges", which the bank applies as interest on the remaining balance.

2 - Seller financing - The buyer is buying the equity in the property, piece by piece.  The seller is charging interest on top of these payments because they are waiting for the full payment over time, instead of all at once, but there is NO CASH needed except for the DP.  There is not "loan" from the bank because the buyer doesn't need all of the cash up front...just the DP.  The seller has to wait for all of their money, but they are making more money since they are adding all of the interest to their income/profit to whatever the sale price is.  

The main qualifier to make this work is the seller must have 100% equity on the property...as in NO DEBT on the property.