Options for a Home Seller – Part 5
Part 5: Owner financing
Part 5 of an 8 part series -
Goal: To educate a home seller on the options for selling their home.
“What are my options?”
This is one of the most common questions I receive from home sellers, and it’s a valid question. How do you, as a home seller, expect to make an informed, intelligent selling decision without knowing all the options you have available? The short answer is you can’t. But don’t fret! The goal of this article is to clarify and explain all the options you (home seller) have when liquidating your property.
Below is an outline of the options at your disposal (in no particular order):
- Traditional Listing
- Net Listing
- Mortgage Assumption
- Cash sale (off market)
- Owner financing
- Short sale
- For Sale by Owner (FSBO)
Now that you know all eight options let’s dive into more detail describing each option and cover a few pros and cons.
5. Owner financing –Owner financing occurs when you (the owner) act as the bank when selling your property. Said differently, you provide the buyer financing to purchase your house. How do you do this? A simple TREC contract with the appropriate boxes checked and an attorney. An example; you are selling your house for 100k that you own free and clear. Instead of getting 100k from the sale the buyer asks you to finance some (or all) of the purchase. The buyer pays you 20k as a down-payment and would like for you to carry 80k at 5%. The buyer will pay you (seller) every month instead of getting bank financing. The buyer will pay all taxes, insurance, and conduct all maintenance and repairs. In this example, you get a nice 20k down-payment and a solid monthly check for the 80k at 5%.
- Avoid large capital gains. In our example above, you may have to pay 20-30% in capital gains if you sold the property for cash but, with owner financing, you avoid that huge tax burden and get a monthly check until the buyer pays the note in full.
- Long term lucrative returns. In some cases, owner financing allows you (seller) to sell the property with high interest rates or at a higher price than you would have received selling to traditional buyers. Some buyers struggle to get financing due to being self-employed or international, which means they will pay a premium (higher than market) to buy your house. Also, the monthly interest payments provide a lucrative (and relatively safe) return, compared to having money in the volatile stock market or bank. At the time of this writing the banks are paying 0.25% interest on savings accounts and the stock market is at all-time highs.
- Passive income (not responsible for repairs). This is truly one of the most passive income streams you can have. Imagine going to your mailbox (or looking at your bank account) at the beginning of every month seeing an extra $500, $1000 or $2000? All these payments come regardless where you are in the world, and at no extra time or effort. You (seller) don’t have to complete repairs, maintenance, pay taxes, or insurance. You simply get the monthly payment for the loan you provided the buyer. If you’re looking for a passive investment this is definitely an option to consider.
- Can sell above market. As mentioned briefly above, some buyers have trouble qualifying for traditional bank financing as they may be self-employed, an international buyer, or have faced hardships in the past. Whatever the reason, banks won’t provide financing to these buyers due to the lending restrictions imposed by the banks after the crash in 2007. This has created a huge opportunity if you are willing to sell your house to one of these buyers that can’t get traditional financing. They are willing to pay a premium (above market) on price and interest rates if you provide them a loan to buy your property. Again, this is another way to maximize the equity you have in your home.
- Buyer may not pay note. As with everything, there are downsides. If you provide the buyer financing for your property and then don’t receive payments you will have to foreclose on the buyer to get your property back, which requires time and money. The best way to prevent this is to get a down-payment of at least 10% from the buyer and have lending requirements (credit score, income verification, etc.). A sizeable down-payment will ensure the buyer has an investment that he/she won’t want to lose in foreclosure. Since you’re acting as the bank by providing the buyer a loan, you can have strict or lax lending requirements. You can require a 700+ credit score, a gross-monthly-income of 3x the month mortgage payment, etc. The options are endless, just ensure you use the same requirements for all buyers so you abide by the equal and fair housing standards.
- Buyer could destroy property. The only other thing the buyers could do is destroy the property while you foreclose, making it a significant investment to be able to rent or sell it again. Again, if you are worried about this then have more strict lending requirements and higher down-payments. A buyer will be less likely to destroy a property that he/she just invested 10-20k in.
Continue with Option 6 of our 8 Part series!