Why would a seller want to do seller financing?

Question

I know that seller financing is the perfect option for some sellers, but what are some reasons that the seller would be interested in it?

Michael C. · Answer

$100k loan, 5% interest, 30year loan

Monthly Payment- $535 ($118 is principal, $417 is INTEREST starting out)

$417 x 12 months =$5,000 in interest income without having to do ANYTHING! No repairing the property, no collecting rents, dealing with tenants.  You are the bank, not a landlord. and as the bank, you don’t evict, you foreclose. You get the house back to sell again.  Lots of benefits.  Have you ever looked at or played with an amortization schedule?   Depending on interest rates you end up paying double your initial purchase price after interest. In this example over the life of the loan- total paid is $192,452 for the 100k loan.

Seller financing isn’t just dividing whatever sale amount you settle on by the loan term. There is interest just like a normal loan.  Over 30 years it equals a lot or interest!But as someone earlier said, most sellers don’t want 30 year loans and will have a balloon payment after 5 or 10 years.  I’d love to seller finance properties, being a bank is easier than being a landlord.

Joe Villeneuve · Answer

The length of the note depends on the seller's position.  If the seller is a retiring REI and selling off their properties, then they can/will/have taken a longer note.  Their alternative is to sell, lose most of their sold equity to taxes, commissions, closing costs. etc..., then invest the rest in some type of steady paper investment, that they don't need to deal with a tenant, and problems.

Seller financing isn't really a loan, it's the seller selling off their equity in pieces.  This means the only money that changes hands is the down payment.  There is no need for a REA, but if one is involved they can still be taken care of.  It's all about the terms, for both parties.  I can offer more than the AP, and still make more money short and long term, and cost me less, than an investor looking to buy are less than the AP.

There should be no reason the refi, if the terms are designed correctly.  In the end, the seller gets a better overall deal, the buyer gets a better deal from start to finish.

Joe Villeneuve · Answer

Seller financing doesn't have to be short term.  I always will buy using seller financing if I can, and if I can get the terms that I want.  If I can't get the terms I want, then like any other analysis on a potential property, I don't buy it.

There are a number of different forms of seller financing.

Joe Villeneuve · Answer

Tax savings

Greater Profit

Cash Flow

Kevin Hunter · Answer

Interest

Basit Siddiqi · Answer

@Anthony SifuentesThey can continue to collect a payment while not having to manage a tenant.They can spread the tax over the period payments are collected.

Account Closed · Answer

Ah I see makes some sense. But the whole point of selling is to collect irrespective of the rents. So in case of vacancy I would still not get paid right?

Account Closed · Answer

I suppose. But I would be uncomfortable giving a 15 yr loan to an individual I don't know. Too much can happen in 15 years and suddenly your checks stop and you have already lost control of the property.  But I guess then its no different than buying a note and carries the same risks and rewards.

Account Closed · Answer

The biggest problem I see from the sellers side is the exit. I don't think most sellers want a 15 or 30 year note. So after 3-5 years the buyer needs to be able to refinance. What happens when they cant? Seller can theoretically call the loan I suppose (assuming balloon) but then has to go through foreclosure to get the property back. Meanwhile the buyer is also in an unhappy position.

Now if the buyer has good credit etc to start with why do they need seller financing in the first place.

What am I missing here?

Dennis Cosgrave · Answer

From my experience, sellers favour seller financing because they get a better return than cash in the bank. This is especially true in the current ZIRP environment. I have seen retired sellers who have paid off their mortgage and their home value has appreciated considerably since they bought it. They are wary of selling for cash and putting that cash in the bank. They are also wary of the stock market and the return they can get on financing the sale is likely equal to or greater than what they can get in the financial markets with much less risk.

Why would a seller want to do seller financing?

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