Seller Financing - Why be the Bank?
Why offer seller financing? Let me give you an example. Many years ago a gentleman bought a rental property, and then realized he didn’t want to be a landlord. So nine months later he sold it for 15% more than he paid, without fixing or improving a thing. The easy terms are what sold it. He took $1000 down, and years later, still gets a payment every month, with 9% interest.
Why offer seller financing? Here are 12 reasons you may want to.
1. You’ll get a higher price
The example above shows that buyers pay for easy terms. Think about it from the buyer’s perspective. He got a place, for almost nothing that the renters are paying for. He’ll do great even if he later sells it for less than he bought it for. I’m sure he loves the return he’s getting, but if he needs to, he can sell the contract for cash.
2. You’ll get a decent return on your money
The 9% annual interest in the example above is nice, but the true return is much higher, since he also sold the property for 15% more than heI paid, and he gets 9% on the entire balance. In fact, for a great return, without the headaches of being a landlord, you can simply buy low for cash and sell high with terms. Of course, this is only if you can tie up your assets.
3. You’ll sell faster
In this case, he just called the buyer up, made the deal on the phone, and closed a week later. But anytime you expand the potential market for a property, you increase the odds of selling it faster. Seller financing definitely invites more buyers to look at your real estate.
4. You can sell difficult properties
With a property that’s difficult to finance conventionally, offering seller financing may be the only way get it sold, and at a fair price. Mobile homes on property can be difficult to finance, for example, so your market is limited. If you instead raise the price 10%, and offer easy terms, you can usually quickly find a family that will be very happy to own instead of rent.
5. When a homeowner’s toilet is clogged, he doesn’t call the mortgage company
Switching from landlord to tenant also has its benefits, not having to worry about calls in the middle of the night because the former renter is now the “owner” and, therefore, the one responsible for all repairs and maintenance.
6. Saves seller in capital gains tax and lets him keep more of his hard earned money
Instead of selling and getting a lump sum of money, subject to capital gains taxes, you use let your asset generate monthly cash flow tax free.
7. Seller can sell the promissory note (usually at a discounted amount) to an investor, if desired
You always have the option, at any time, to just sell the note. That would give you a lump-sum payment.
8. The seller can have his retirement secured by an asset vs. having his money tied up in paper assets
The seller can realize a good chunk of change that comes from getting the equity out of his property at the time of sale or he can have the benefit of a structured deal where over time he receives money from the buyer every month, every quarter or however the payments are structured.
9. Both buyer and seller can negotiate their own terms
Since the note is between just the buyer and he seller, you can be flexible with the terms to the needs of either party.
10. Eliminates the third party (bank) and forth party (real estate agents)
Less people to pay means more profit
11. May be able to sell the property “as is,” instead of making costly repairs
Because you are making allowances for persons that might not be able to purchase a house through conventional means, part of the deal could include as “as is” clause, meaning the new buyer will do all repairs, upgrades, etc.
12. If the buyer stops making payments, you get the house back, get to keep the down payment – plus any money that was paid to-date
If the buyer defaults, the house goes back to the seller to re-market and sell again or rent out.
If you have mortgages and other loans on the property, you may have to structure the deal slightly different. If you own the rental free and clear, you can sell it any way you want. What is important is that you build in enough of a spread between the mortgage amount and the buyer’s monthly payment to yield a significant monthly cash flow. There are many different approaches to seller financing though, even if you own the property out right or not. There are ways to do this more safely too. However, those topics are for another article.