Mortgages & Creative Financing

4 Reasons Property Owners Might Choose to Sell via Seller Financing

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If I gave you the choice between getting $100 today or $1 per month for the next 30 years, which would you take? Most of you would want the $100 right now, but if you do the math, $1 per month for 30 years is $360, which is more than three times the lump sum of $100. Still want the $100?

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Some of you reading would take the $1 a month, whereas others would take the lump sum. It all comes down to personal choice. The same principle this question demonstrates is true for home sellers. Many homeowners who own their house free and clear would rather take the cash and move on. However, for a large number of sellers, the value of getting monthly payments outweighs the need for a large lump-sum check.

Let’s look more closely at why owners might choose to sell via seller financing rather than just getting cashed out.

4 Reasons Property Owners Might Choose to Sell via Seller Financing

1. Monthly Income

Perhaps the most common reason sellers would prefer to sell via seller financing is to get monthly income. As in the $100 or $1 per month example I used, a lot of individuals would simply prefer to steadily receive checks each month instead of one lump sum. This is especially true for older sellers on a fixed income who need stable monthly income to survive and pay the bills. A $100,000 chunk of money would last only so long for a seller, but if that income were financed over 30 years, the money would last them much further into retirement.

2. Better ROI

Many homeowners choose to sell with seller financing because the interest they get from the financing is greater than they would likely get elsewhere. For example, if a homeowner were to sell a home for $100,000, they could put that money into a certificate of deposit at the bank and receive 1.5% annual percentage yield, or they could seller finance their home and get 6%, 8%, or more.

Related: 5 Reasons to Consider Seller Financing for Your Investments

Many seasoned real estate investors understand this concept and eventually move their portfolio from a "holding" phase to a "selling" phase, using seller financing to avoid the hassle of being an owner, while still collecting monthly income by carrying the
contract. Therefore, some of the best possible candidates for seller financing are other real estate investors who are changing their
strategy. (On a side note, this is another reason making friends with as many local real estate investors as you can is so important.
When they are ready to get out of the landlord game, they may choose to sell to you and carry the contract in the process.)


3. Spread Out Taxes

Anytime you make money, the government wants its share, and when you sell real estate, it’s no different. This issue may not be as important for homeowners, because of the IRS rule that allows homeowners to avoid paying taxes on up to $500,000 in profit from selling their primary residence, as long as it meets certain specific criteria.

However, real estate investors are not so lucky and are must pay taxes when they sell. For example, if an investor spends 30 years
paying off a rental property mortgage and now owns the home free and clear, and he decides to sell the property for $100,000, that investor would need to pay taxes on that gain, which could result in a hefty tax bill.

Related: The Pros and Cons of a Seller Financed Deal for Seller and Buyer

Therefore, many investors choose to sell using seller financing rather than getting a lump sum, to spread out most of those tax
payments over the life of the loan on the seller financed property. You see, the IRS has special tax rules for installment sales, such as ones using seller financing, so the seller may need to pay only a small portion of that tax bill each year while the loan is being paid off. Be sure to talk to a CPA for more details on this.

4. Can’t Sell Otherwise

Many properties simply are not sellable to a typical bank-financed borrower because they are in such poor condition. Seller financing can allow the seller to unload such a property without needing to fix it up first.

[This article is an excerpt from Brandon Turner’s The Book on Investing in Real Estate With No (and Low) Money Down.]

Have you used seller financing before? Any other motivations you’ve seen that convince owners to go this route?

Leave your comments below!

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He is a nationally recognized leader in the real estate education space and has tau...
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    Account Closed Rental Property Investor from Johnstown, PA
    Replied almost 3 years ago
    I would take the $100 today, and then make the same offer to 100 fools who take the $1 a month. I can invest the $100, make far more than $36,000 I will have to pay out over the next 30 years ($360 x 100 fools) and walk away with a pile of cash. But after all, isn’t that what each of us does as landlords: rent a place to someone who is incapable of buying a place for themselves. We put up the cash, then leverage that into real estate fortunes.
    Marcus Lawson from Roselle, NJ
    Replied almost 3 years ago
    Lol, I personally would take the 100 dollars today. But you finding 100 “fools?” (I don’t why they are fools everyone has different situations) to do the same thing, means that you are working and managing your properties to some extent and dealing with all types of issues that arise. Most 70+ year old wants no part of that. And also for the people who keep 10s of thousands in the bank, a 5-8% ROI sounds like a win-win. Also, I would rethink the whole view of a landlord. Many people chose to rent.
    Account Closed Rental Property Investor from Johnstown, PA
    Replied almost 3 years ago
    There’s an old expression about money: “A fool and his money are soon parted.” A similar one to that is: “There’s a sucker born every minute.” This does not imply I see all people as fools or suckers: it simply means that in our greedy, consumer-driven world, people will do just about anything for a buck. I follow this rule: “It’s easy to make a buck. It’s a lot harder to make a difference.” Tom Brokaw We live in a world where 95% of the people don’t know how to turn a screw, close a water valve, or even hammer a nail. Americans have become lazy and for the most part very ignorant of how to do anything for themselves: the majority of people know how to download an app and text, but can manage little outside that because of ignorance. As a society we will fall not because of enemy powers, but due to our own failure to DO anything for ourselves anymore. It wasn’t long ago when Americans took care of themselves, figured things out, and set the world ablaze. Today, Americans would rather watch the tube, surf the net, and ‘chill.’ We have become fools and suckers through our laziness, greed, and general ignorance: this is how we ended up elected a monster to the White House. We want someone else to fix the brokenness of this nation without having to leave our couch: sorry, it doesn’t work that way. Wake up Americans, before you are fooled and suckered out of everything you have.
    Replied almost 3 years ago
    Under the new rules: Does SF to an owner occupant require a 30 year note? (no balloon payment = minimum 30 years to compete) If so, Does the same rule apply to an investing non-occupant? (balloon payments are ok)
    Owen Schwaegerle Real Estate Broker from San Luis Obispo, CA
    Replied almost 3 years ago
    This is a great article! I’ve found an off-market property where the owner wants to do an owner-financed deal since he does not want to go through the hassle of listing it, repairing it, appraising it, etc. The property is zoned single family, but has 3 dwelling units on it. This seems like it could be a violation of the zoning, so how would I know if the property is legit or if it needs to be rezoned?
    Gerald Hand from Flower Mound, Texas
    Replied almost 3 years ago
    Check with your city/town and have a building inspector come out to ensure the dwelling units are built to code AND fall into the correct zoning for the area. I would also ensure the inspector knows your intent is, I presume, to rent the units to others. If the inspector decides against the situation, don’t despair; look into getting the property exempted or perhaps rezoned. Hope that helps