10 Seller Financing Myths

We often wonder why the seller carry-back market, despite being in existence for hundreds of years, is still a relatively unknown market. It is not overly complex. The benefits to sellers, buyers, and investors are significant. 

Private mortgage notes can be a powerful alternative to bank financing for both buyers AND sellers. But many folks stay clear because of common misconceptions.

It’s time to set the record straight about owner financing.

Myth #1 – Seller Financing is Too Risky

All investments carry risk. Seller financing is no different — but unlike some investments it can be structured to minimize risk.

Smart property sellers reduce their owner financing risk by:

• Requiring a down payment

• Reviewing buyer credit

• Verifying income and the ability to repay

• Charging a reasonable fair-market-based interest rate

• Having professionals help with title and docs

• Using a loan servicing company to track payments

• Collecting escrows for taxes and insurance.

The great thing is these same items that help reduce risk also increase a note’s value.

Myth #2 – Once You Create a Note, You’re Stuck with It

Not so. You always have the right to sell your note and the reason for selling doesn’t matter. Investors purchase both performing and non-performing notes (though non-performing notes are bought steeper discounts). Also, you can also sell just some of your note or all of it.

Myth #3 – If You Don’t Own the Property Free and Clear, You Can’t Owner Finance

Not so. Many properties are seller-financed in the form of a “wraparound mortgage.” You can sell a property using seller financing even if you still owe money. Just make sure you provide proper disclosures and documentation in the transaction.

Make sure to continue making your payments on the original mortgage as you collect the wraparound note payments from the buyer of the property.

Caution 1: While there are risks of a lender exercising any due on sale clause, these can be mitigated with proper structuring and servicing.

Caution 2: If you decide to sell your wrap note in the future, most note buyers will want your original mortgage to be paid out of the proceeds. Selling the note and paying off the underlying loan is also a solution to any due on sale issues.

Myth #4 – Seller Financing is Only for Buyers with Bad Credit

While owner financing can help buyers who don’t qualify for bank loans, it’s not exclusive to those with poor credit.

Many qualified buyers turn to owner financing for various reasons, including hard-to-prove self-employment income, unconventional properties, desire for flexible terms, privacy and more.

Myth #5 – It’s Not Legal

It’s 100% legal. This myth comes from confusion surrounding the Dodd-Frank Act. It put in place consumer protection guidelines for buyers living in the property as their primary home that can also apply to owner financing. However, it does not alter the legality. We recommend using a Mortgage Loan Originator (MLO) – called a Residential Mortgage Loan Originator (RMLO) in Texas along with a qualified attorney to be sure you stay compliant.

Myth #6 – You End Up Getting Less Money

Not so. The flexibility of owner financing often helps sellers get top-dollar for their home or property.

First, you have access to a larger pool of buyers. And for cases of hard-to-finance properties, you aren’t stuck with cash buyers only. Additionally, you receive interest income and may be able to defer capital gains tax on the sale.

Myth #7 – You Give Up Control if You Offer Owner Financing

You actually get more control when offering financing. You get to set the terms from the down payment to the interest rate to the default remedies. You can also require escrows for taxes and insurance. Owner financing puts you in the driver’s seat. Moreover, you can foreclose on the property if the buyer doesn’t pay.

Myth #8 – Owner Financing is for a Buyer’s Market

Owner financing it works in all kinds of markets. In competitive markets, seller financing can help sellers achieve the full asking price or sell unique properties that banks might otherwise refuse to finance. In slower markets, offering flexible funding makes your property stand out and attract more offers.

Myth #9: Seller Financing Doesn’t Provide Immediate Benefits

While you won’t receive the full sales price of your home upfront, as with bank financing, you can still secure a decent sum. You may also be able to sell at a higher price if it comes with owner financing. 

We highly suggest requiring a down payment when offering seller financing — usually at least 15%-20%. This helps increase the resale value of the note, reduces your risk, and puts money in your pocket right from the start.

Myth #10 – Only Real Estate Investors Offer Owner Financing

Most seller financing is done by “mom-and-pop” home sellers, who create one note per year. In 2024 real estate investors only made up 14% of new notes created that year.

Don’t let outdated misconceptions prevent you from exploring owner financing. Done right, it’s a flexible and powerful tool for sellers, buyers, and investors. Call us with any questions – no obligation.