Seller financing occurs when the person selling a property decides to finance the buyer's loan. Assuming the same role as a bank or mortgage company, the seller and buyer negotiate the terms of the loan and a repayment plan. The seller not only receives the agreed price of the property, but also earns interest on the loan, which is paid over the decided course of repayment.

Anytime buyers take out loans from commercial lenders, the parties sign promissory notes, which are legal documents. With seller financing, promissory notes are not a requirement, but still recommended. Having clear, legal documentation of the loan and repayment terms can clear up misunderstandings between the parties, and also prevent tax issues from arising.

Seller Financing into Cash

With seller financing, the seller does not immediately have access to the money made. However, a properly constructed real estate note can be sold to mortgage note buyers for cash at a discounted price. This means the seller would not receive the same amount of money as he would through the course of repayment. However, he would have instant cash from the note buyer, and the note buyer begins collecting payments from the property buyer.

Reasons for selling real estate notes can vary greatly, but generally the original note holder sells it because he needs cash now. The person may need to pay college tuition, or medical bills. The note may be sold to buy a second home or to take a vacation. Some people just grow tired of collecting monthly payments, while others grow worried about foreclosure.