For anybody buying or selling raw land, seller financing is an underappreciated way to save money and pay loans off faster. We’ll explain how to set it up.
To set up seller financing for raw land, agree on reasonable terms for both parties with the seller. This includes the required payments, price, loan term, and interest rate. The three ways to set up seller financing include a promissory note, land contract, and lease-purchase agreement.
Seller financing can be an attractive option for buyers looking for more flexibility with their purchases, but it comes with its own set of risks. Because of deals in the past, we understand the pros and cons and how to set it up efficiently, which we will explain further.
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How To Set Up Seller Financing For Raw Land
Seller financing is a popular option for buyers who want to purchase raw land without involving banks and other lenders. But, there are some conditions that buyers should be aware of before they sign on the dotted line.
To structure the deal properly, consider the down payment, purchase price, loan term, and interest rate. Follow these steps to get everything set up properly.
Propose Seller Financing
First, we need to propose seller financing to the property owner. Sometimes this can be tricky if they are not into the idea, and it can be a good idea to involve a real estate agent in this step.
Assuming we have the seller on board and willing to work with us on financing, we can move to focus on the terms of the deal.
Agree On Terms
Agreeing on terms for seller financing takes work. Many factors need to be calculated, like the down payment, purchase price, loan term, interest rate, monthly payment, and balloon payment.
The down payment required for seller financing will vary based on pricing, credit profile, and the terms agreed on with the seller.
Typically, the down payment ranges from 15-35%, depending on the contract.
Obviously, the purchase price must also be agreed on and included in the terms. The agreed purchase price will determine all other aspects of the financing.
The loan term is the length of the loan granted, meaning a fixed amount of payments is required. For seller financing deals, it’s rare to see deals any longer than about 15 years.
The interest rate will also be something that needs to be agreed on with the seller. Many times, it’s possible to negotiate a better deal with a seller than the fixed rate offered by banks or private lenders.
In the contract, the monthly payment should also be listed. This is the minimum amount needed to pay each month to stay current like it were rent or a mortgage.
Lastly, nearly all seller financing deals include a balloon payment. This is required because only a few sellers are willing to grant a 30-year loan as the bank would, so a balloon payment is a final lump sum at the end to shorten the loan term.
Consult With A Real Estate Agent Or Lawyer
After the contract is written and terms are discussed, we recommend bringing a lawyer or real estate agent into the discussion if not already.
This will help get the best deal and to avoid any issues that might be missed in the contract without professional help.
Sign The Agreement
Once the agreement has been reviewed and examined carefully, it can be signed, and the property transfer from the seller to the buyer can occur.
How Should Seller Financing For Raw Land Be Structured?
Seller financing is a way of financing the purchase of a property through the seller rather than getting a traditional loan or mortgage.
In this type of loan, the seller finances the purchase price and interest payments on a property in exchange for equity in the property. There are a few ways to structure a raw land deal with seller financing.
Promissory Note Financing
Promissory note financing is one of the common ways to set up seller financing for raw land. It is similar to a traditional mortgage, but instead, the agreement is between the buyer and seller.
The note will include all loan details like the down payment, purchase price, loan term, and more. Banks and lenders don’t get involved, and the buyer’s name gets put on the house deed giving the seller power to evict or foreclose the buyer if they don’t pay in the future.
Land Contract Financing
A land contract is similar in structure, but the house deed is not given to the buyer. Instead, this contract is signed by both parties, and the deed is transferred to the buyer when the loan is paid in full.
However, this leaves the buyer open to refinancing in the future so the deed can be transferred under their name. But this can only happen once the seller gets paid.
Lastly, seller financing can be set up through a lease-purchase agreement. This is an interesting and less commonly used strategy for raw land, but the concept is simple.
The buyer technically leases the land and pays monthly rent based on the purchase price. When the lease term is up, the buyer can purchase the land or give up the lease with no risk.
The best thing about this structure is that the rent paid gets applied toward the original purchase price. Some buyers opt to do this when they are low on cash at the start of the project, and by the end of the lease term, they can afford to make the rest of the payment.
Do You Need To Pay A Down Payment For Raw Land With Seller Financing?
In most cases, sellers will require a down payment from buyers and provide them with seller financing to close their deals. While this may seem like an additional cost for buyers, it's actually not.
Seller financing is a much more flexible method when purchasing land, so there are no set rules. This includes down payments which might not be required depending on the seller’s preference.
However, this is rare and eventually causes the balloon payment, monthly payment, and interest to be larger without any down payment. We should avoid this and pay some money upfront upon purchasing.
A down payment ensures that the buyer can afford to pay the loan and shows a sign of good faith to the seller. Nearly all loan types for real estate involve a down payment.
Advantages Of Seller Financing For Raw Land
Financing raw land is unique but provides plenty of advantages for buyers. This includes fewer fees, lower interest costs, and a simple transaction process.
No Additional Fees
Seller financing can be a great option for those who want to buy raw land but need more buying power or credit to do so with the help of a traditional lender. It’s also a way to save money and avoid fees.
When dealing with a bank, many added costs, like closing costs, are removed from the sale. This can be big savings for many buyers, especially if they have a below-average credit score.
Lower Interest Costs
Seller financing is becoming more popular with buyers because it allows them to get into a home that they otherwise wouldn't be able to afford due to higher interest rates.
Sellers are willing to work with the buyer and provide more friendly rates, which leads to huge savings for the buyer over the loan's lifetime. However, this isn’t always true, so be careful during negotiation.
Simple Transaction Process
Lastly, the transaction is a much cleaner and more straightforward process when setting up seller financing. There are no complex requirements like bank checks, and it’s simply two people closing a deal together.
Fewer people need to get involved, and closing the home is much faster. For some, this is a benefit, but the expedited process can also present risks too.
Disadvantages of Seller Financing For Raw Land
While there can be some benefits to seller financing, there are also some disadvantages too. This includes no reporting to the credit bureaus for buyers looking to build credit and no home inspections.
No Reports To Credit Bureaus
One of the downsides to seller financing is the mortgage payments don’t get reported to the credit bureau because it’s a private deal. This doesn't help new raw land owners trying to build credit.
The other risk is there are no in-depth inspections or assessments of the property, which would be required when funding the deal through the bank.
However, because it’s raw land, this is less of a concern, and there are not many regulations to worry about, so we typically overlook this because of the other seller financing benefits.
About THE AUTHOR
Brittany has been in the land business since 2020 when the world was starting to shut down. Since then, we’ve sold to dozens of people from ATV weekend warriors to camping enthusiasts to retired truck drivers. Our inventory spans mostly in the western United States. We’ve been trained by experience, land acquisition courses, and hundreds of hours meeting with county assessors and clerks, zoning officials, realtors, and land investors. We’ve answered hundreds of questions from people regarding the buying and use of land.Read More About Brittany Melling