Pricing Your Seller Financed Property
I am often asked about pricing a property for resale if the seller is willing to offer financing terms. The capitalist answer is: Sell for any price that is agreed upon between the buyer and seller. While that sounds quite cut and dry, in this current economic climate, it is inaccurate. This brings us to a discussion point as it relates to pricing. Knowing what your property is worth and what someone will pay for it are often two very different things.
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When real estate was booming, people often paid more than market value for real estate because they were speculating on future value. Today, that boom cycle is over and people are willing to pay less for your property even though you believe it is worth more. To make matters even more interesting sellers traditionally like to offer seller financing pricing as a means of eventually getting the end buyer to refinance the property with a mortgage company. Unfortunately, the bank refinancing side of seller financing is at an all-time low. That often leaves sellers and buyers in contracts for the long term, or for longer terms than they both expected.
It should be noted though, that this current lending crunch will eventually end. That means sellers offering financing to qualified buyers will be able to refinance those properties if they priced their sales price correctly. But, what is “correct”?
Going back to our capitalist answer/thought process remember this: Whatever is agreed upon between buyer and seller is never the right answer for banks. In fact, if you are considering selling with financing and hoping to get your qualified buyer to finance you out of the deal here are a few key items to consider:
- Get a 3rd party appraisal of your property at the time of sale. Keep that appraisal on file for when the client applies for a bank loan
- Run comps within a .5 mile radius of your property for sales in the last 180 days sold with financing. This will give you an relatively accurate picture of financing prices
- Consider pricing your property for market value or slightly below value. Leave some “profit” on the table if you can or go into your sale understanding that the bank may try to knock some of the end price on the refinance
- Even if you never intend to finance your buyer out, avoid creating pricing that leaves you with no alternative options other than to have them pay you off over time.
While most of this is common sense it is important to be mindful of these concepts because markets will change in the future and note owners will look to the banks as a viable finance out option in the years to come.
Photo Courtesy: Ell Brown