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Posted about 13 years ago

5 Reasons to Offer Seller Financing

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: 

1. 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. 

2. 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. 

3. 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. 

4. 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.  

5. 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.


Comments (7)

  1. Hi @Doug Rush, I have some questions about reasons for purchasing a seller-financed deal as a buyer. I have an acquaintance that will work with me on a deal. He can either become the note investor by purchasing a home outright and then financing it to me, or he can loan me the money so that I buy it outright and he acts more as a private lender. We would write up a contract for a 30-year time period. Which option would be better? I have an LLC and considered putting the home directly into the LLC from the get-go.


  2. Here is a comment I received (via e-mail) from a RE Agent: I agree with you 100%. I now have a listing of a brand new home that has been on the market for over 3 years, with no activity. I took over the listing in Oct. 2010 and offered owner financing a few weeks ago. I Have shown the property 8 times in 4 weeks and had 4 offers. The interest rate was only 5.5%. However, the first client could not handle the monthly payment. The second client, couldn't come up with the down payment. The 3rd client offered less down and the owner accepted. The owner was allowing the buyer to pay less down and gave them 6 months to pay the down payment. However, the client wanted the down payment on a Promisory Note instead of the Mortgage. Naturally, that one did not fly. The 4th client this weekend wanted to trade a new motor home and lot for the home, with cash difference. You are right, owner financing will definately spark the activity. I'm sure it won't be long to the right offer is made. Just a small interest amount makes a lot of difference over a period of time. I haven't been doing this very long. All of my sales have been for cash except for two. One was owner financing and the other was REO property. The buyer got tired of waiting for an answer and withdrew. I love those seven to ten day closings and I'm always available to close on Saturday. Your are right on target. ..


  3. great post...owner financing rocks...it allows both sides to be creative and not be bound by the every growing constaints and costs of bank financing...This is a great post for any listing agent representing a frustrated seller that is considering renting a home out and cancelling a listing...


  4. Great article! David makes some good points too. I never have seen how people can make the installment sale pitch for gain recognition effectively with mortgage rates so low. Even at 8% or so on seller financing the money could be put to work better for many people.


  5. Nice article. Other positives: * Installment sales spread out the recognition of the gain for tax purposes. * You can sell the house for a higher amount that may be difficult to get an appraisal for if the borrower goes with a conventional lender. OTOH, it is to your benefit to get the cash back out if you have an investing model that generates ROE's substantially higher than the interest income on the note. Many/most flippers do. In that event, it is helpful to develop expertise in loan products and a list of lenders that can work with more difficult borrowers. You also need to know the note market well, to project the economics of your selling the note to get your cash back. But you're right, some folks are just locked out of bank financing due to foreclosures, short sales, deed in lieu, etc., and many of these may be reasonable credit risks if you can get a reasonable down payment. For these, it could make a lot of sense, but you should charge a rate commensurate with the credit risk.


  6. Seller financing can be a win-win. A little more difficult to do now, but still doable.


  7. Excellent article Doug!