Seller financing and liability
A seller who wishes to sell his property can also help the buyer bring the transaction to fruition by lending him a sum of money, either as a down payment or to make up the difference between the sale price and the amount borrowed from a lender.
This practice is called balance of the sale price, or seller financing.
In this situation, the seller acts as a sort of private lender to the buyer in order to enable him to purchase the property. The buyer reimburses the seller according to the terms agreed in an agreement signed before a notary and protected by a mortgage, with interest.
This type of situation is usually encountered in the sale of an income property or a business.
In residential brokerage, the practice is less common. It is sometimes encountered when a home is purchased by a member of the seller’s family.
Example:
Sale price of the property: $1,200,000
Maximum borrowing capacity allowed by lender: $1,050,000
Amount of seller financing: $150,000
The buyer reimburses the seller over a period of seven years at an annual rate of 4.5% as per an agreement.
► DUTIES AND OBLIGATIONS OF THE BROKER
A broker representing a seller in this situation must advise his client to consult a professional such as a lawyer or a tax expert, as this practice requires certain precautions, including the following:
- The seller must obtain mortgage guarantees to ensure repayment of the loan.
- If the transaction concerns an income property, the property must be “profitable,” since the income is often the buyer’s primary source of revenue for repaying the loan to the seller.
- The seller must know that he will be considered a second-ranking lender after the official lender, such as a financial institution.
