How Seller Financing Benefits the Seller
There are countless reasons why someone might choose owner financing, but here are the top 6
- Higher sales price
- Can sell an unmarketable property
- Tax benefits
- Monthly income
- No agent fees
- Higher interest rate
Higher Sales Price
Investors are purchasing a property and making offers based on the cash on cash return. You can read the article I just linked to for more information about it, but in general, it works like this:
In this example, the buyer invests $100,000 and gets $10k per year for income. That is 10% return.
Every investor has a goal for their returns and they make offers based on this. Here’s why owner financing lets you get a higher price.
The less the buyer invests for a down payment the higher their return!
This is why you can get full price or even higher if you seller finance.
You Can Sell an Unmarketable Property
Listing agents work on commission. Cheap properties require MORE work than expensive properties and pay less. If you were an agent, would you want to do that?
Of course not. So, if you’re having a hard time listing your property, you may want to consider seller financing.
I’m not a CPA, so please consult one.
But, typically you are taxed on capital gains the year you receive them. So, if you earn back the principal over several years, your tax burden is deferred.
Many older sellers will choose owner financing because it’s kind of like getting an annuity or bond dividends but backed by the value of the property.
If you sell your property and finance it yourself, you may get…say $1000/month. You will receive this every month until the loan is paid off. It’s very stable and you don’t have to worry about market fluctuations destroying your nest-egg.
Higher Interest Rate
You can often charge above market interest rates. Since the buyers are earning more, you can charge a higher price up front and get a higher interest rate throughout the life of the loan.
How Owner Financing Benefits the Buyer
There are a lot of benefits to the buyer, but here are the top 5:
- Flexible financing
- Easy to qualify
- Lower down payment
- Lower closing costs
- Quicker close
Flexible Financing When Financed Through the Seller
Do you want a 10-year term with 40-year amortization? Or, perhaps you want a 2-year interest only period with a 5-year term with a balloon payment at the end.
The ways to structure a private loan are endless. In fact, the seller may make adjustments on the price if the terms are favorable – for example a lower price in exchange for a higher interest rate.
Easy to Qualify
Banks are highly regulated and need to show regulators all of the risk and how they are mitigating it. Additionally, most loans need to conform to Fannie Mae lending guidelines. So, the requirements are the requirements and there is simply no way around it.
With owner financing, they may look deeper and take into account the whole picture. For example, a bank doesn’t care if your business is doing well if you took too many tax deductions you still won’t qualify. An individual can take all of this into consideration.
Lower Down Payment
Sellers often require no, or very little down payment that covers their closing costs. Typically, a seller-financed deal needs some improvements, so the new owner will do those repairs and create the equity that normally would be required when purchasing conventionally.
Cheaper Closing Costs
There will be no points, brokers fees, etc. Need I say more?
Since there is no qualification period the bank can’t drag its feet. After title search and inspection, you’re ready to close.
What Are the Risks of Owner Financing?
Everything sounds so amazing, so why doesn’t everyone do it?
Well, the #1 reason most people don’t do this is that the seller needs to own it free and clear (or have a very small loan the buyer can pay off).
This eliminates 90%+ of people right away.
Of the remaining 10%, things need to work out a certain way. The seller should want long-term stable income rather than a pile of cash. Or, the seller must have a property that is not maintained well and will have a hard time selling on the open market.
On the reverse side, that seller who might be only 1 or 2% of sellers needs to find a buyer that wants to pay above market price and above market interest rates. Buyers typically only do this if they are aggressively pursuing deals and have run out of funds. Also, some newer investors will pursue this option.
If you do find the right buyer and the right seller, there are still a couple of risks. They are:
The biggest risk to the seller is if a buyer defaults on the loan.
You can mitigate this risk by doing a solid background and credit check. Also, it helps to hire a 3rd party payment processor to collect and disperse payments. This way, there is less incentive to default as they know there will be a quick foreclosure if there is a problem.
Also, I think the risk of default is lower because the seller and buyer can easily renegotiate the terms should the economy collapse again. Your goal is to keep the income flowing, not repossess the property.
The biggest risk is the fact that your capital is not liquid – you cannot just sell some stock and have your cash back.
The fortunate thing is there are markets where you can trade your notes. You may have to sell it at a discount, but you should only use.
Should I Seller Finance?
Only you can answer that question. If you want to get a higher price and higher return over a long period of time, it seems like a no-brainer. If you want your cash now, then it doesn’t make sense at all.
If you’re a buyer, you should seek owner financing if you don’t have the cash available to purchase the deal, or if the seller is asking more than the value of the property.