Why would a seller allow a buyer to make payments over time for the purchase of property?
Here are five reasons sellers consider financing property rather than requiring the buyer to obtain a bank loan:
- Reduced Marketing Times
What is the first thing a real estate agent does when property is not moving and has been on the market for 60 to 90 days? They reduce the price and add the tagline “price reduced” to all advertising and signs. Rather than reduce the price, it might be beneficial for the seller to offer financing. Buyers provided with financing can certainly pay full price in exchange for the many benefits they receive with owner financing, including the money they save by not paying expensive loan fees, origination fees, and points.
- Increased Inventory of Prospective Purchasers
By offering owner financing, the seller increases marketability with a wider group of available purchasers. Statistics show that almost 40 percent of the American population is unable to qualify for traditional bank financing. While not all of the “unqualified” group would be an acceptable risk for owner financing, it still widens the market of prospective buyers considerably. Anyone who has added the words “Owner Will Finance” or “Easy Terms” to a For Sale ad or Multiple Listing Service (MLS) listing knows the phone will ring off the hook with interested prospects.
- Reduced Closing Times
Another advantage of offering owner financing is substantially lower closing times. A closing involving a third-party conventional lender can take six to eight weeks while closing a seller-financed transaction through a reputable title company can take as little as two to three weeks. This is due to the reduced paperwork and less restrictive due diligence process.
- Investment Strategy for Hard to Finance Properties
There are many properties that encounter financing difficulties including mixed use property, land, mobile and land, non-conforming, low value, and others. Investors realize excellent returns by paying a reduced cash or wholesale price on a hard-to-finance property and then reselling at a higher retail price with easy financing terms.
- Interest Income
Why let the banks earn all the interest? Sellers can keep the property-earning income even after they sell by offering owner financing. For example, a $100,000 mortgage at 9 percent with monthly payments of $804.62 will pay back $289,663.20 over 30 years. That additional $189,663.20 (over the $100,000 mortgage) is power of interest income!
If considering seller financing, be sure to consult with a qualified professional to properly document the transaction. It also helps to speak with note investors to gain insight on appealing terms and structuring techniques. This assures top-dollar pricing should you ever want to convert the payments to cash by assigning your note, mortgage, deed of trust, or contract to an investor.
10 Advantages to Using the Seller Carry Back
The word is out and seller financing is on the rise as buyers and sellers look for creative ways to finance property in the struggling market.
So what’s all the hype?
Here are ten advantages to using the seller carry back to buy or sell real estate.
1. Shorter Marketing Times – Properties marketed with “Owner Will Finance” will draw a greater response rate and generally sell at least 20% faster than properties requiring conventional financing.
- More Buyers – With many lenders’ tightening their approval process, the seller carry back enables a greater number of buyers to purchase and finance a home.
- Speedy Closings – Without the red tape of a conventional mortgage lender, a real estate transaction can close in as little as two to three weeks.
- Maximize Selling Price – The seller has an opportunity to realize full market value for a property when providing financing. This is viewed as a sales concession in many markets.
- Reduced Restrictions – Restrictive lending requirements don’t apply providing greater flexibility when it comes to the buyer’s credit history, down payment, debt to income ratios, and other underwriting criteria.
- Fewer Costs – There are no expensive loan costs to worry about. A buyer can put the money they save on origination fees, points, underwriting fees, mortgage insurance premiums, and junk fees towards the down payment and building equity.
- Interest Income – The seller is able to collect long-term interest since they are essentially acting as the bank by extending terms to the buyer. On average a buyer will pay back 2 to 3 times the amount of the mortgage on a 30-year term as a result of interest.
- Installment Sale Tax Deferral – When property is sold at a gain and subject to tax there can be an opportunity to delay a portion due when reporting under the Installment Sale Method (Refer to IRS Publication 537, Form 6252 and speak to a qualified tax professional for further details).
- Secure Asset – The balance of the purchase price is collateralized by the property. If the buyer stops making payments the seller can take back ownership of the home.
- Liquid Asset – The seller owns a liquid asset, which is just a fancy way of saying somebody will purchase the note, mortgage, trust deed, or contract on the open market. Many sellers elect to sell their future payments to a note investor or note buyer for cash today rather than payments over time.
Seller financing offers a creative solution to financing real estate but there are some risks. For the flip side of the coin be sure to read the Disadvantages to Owner Financing. It also pays to consult with qualified real estate, tax, and legal professionals to make sure today’s solution doesn’t turn into tomorrow’s problem.