SELLER FINANCE

Seller financing and Its Consequences on Real Estate Marketplace

Abstract

Quality problems that are known to seller of the product, but will become known to buyer only after purchase have potential to frustrate voluntary exchanges. Where determination of quality after sale is cut-and-dried, brand names and unconditional guarantees will bond contract performance. When problem is more subtle or confounded by extent of consumer inputs, requiring risk-sharing by contracting parties, these bonding devices typically are not sufficient. Under circumstances, seller financing may be the efficient contracting solution for bonding quality dimension of contract. This form of financing makes both buyer and seller share risk that product may not suit buyer's needs in way promised by seller. This paper provides further empirical evidence on quality assurance role of seller financing. We consider seller-financed second mortgages in National Association of Realtors database. Seller financing in second mortgages may be the supplement to first mortgages supplied by conventional lenders. The role of seller financing as the quality assurance mechanism in second mortgages is more complex than its role in first mortgages, but is also less subject to the alternative interpretation of credit rationing than is its role in seller-financed first mortgages. To avoid further complexities, we do not consider second seller financing transactions that supplement first assumption mortgage transactions.

Table of Contents

SELLER FINANCING AND ITS CONSEQUENCES ON REAL ESTATE MARKETPLACE5

Thesis Statement5

Introduction5

Discussion6

Seller financing explanations9

Data10

Constructing sample12

Empirical model and variable definitions17

Empirical results21

Analysis28

Conclusion30

Seller Financing and its Consequences on Real Estate Marketplace

Thesis Statement

Sellers / developers can expect to obtain higher sales prices in depressed markets by, selling real property via seller finance, with small down payment, lower interest rates, and the ballon payment in the short holding period after 5 years with longer amortorizations.

Introduction

Why does the seller provide financing to buyer in the property exchange? While volume of seller-financed transactions in property exchanges is not large, it has been around for the long time and present in many countries. Furthermore, trade credit in retailing and business-to-business commodity exchanges is the form of seller financing. Its volume is indeed quite large. The survival of seller financing, despite breathtaking pace of financial innovation in recent decades, indicates that this form of financing continues to be the viable market mechanism and that whatever its functions may be; they are of continuing and encompassing importance to consumers. Surprisingly, not only is our understanding of role of seller financing especially in property exchanges limited, there is also very little empirical evidence on this topic.

Discussion

An agreement between the buyer and the seller of the asset, usually real estate, where the seller directly holds the debt. That is, rather than going through the financial intermediary such as the bank, the seller and the buyer conclude the transaction and the buyer makes payments on the asset at the agreed-upon rate of interest directly to the seller. This is useful for the buyer when he/she could not otherwise obtain financing. It can also be useful because the interest rate is often lower. Likewise, the seller can often receive the higher ...