You Can BUY SPEED & Sell Your House FAST with Seller Financing
The most obvious benefit, and the one which most sellers are looking for is the ability to sell their house in any market. Offering seller financing attracts a larger number of interested buyers. There is no question the requirements to qualify for a conventional loan prevents some people from buying. In some cases, an otherwise acceptable buyer has some irrelevant “baggage” which prevents loan qualification. An owner-financed sale to someone like this may make a sale possible, which would otherwise not happen.
Seller Financing Often Get A Higher Sales Price:
Buyers sometimes have trouble coming up with the down payment and closing costs needed to buy a home. They may have good jobs, make lots of money, make their payments on time, but never be able to save anything. They may be perfectly happy to pay more for a house, which requires a smaller down payment. If you raise the sales price and loan amount but lower the interest rate then more of the monthly payment will go to principal and less to interest. For the seller that means more capital gains type income and less interest income. Depending on the seller’s tax situation this can be significant. For the buyer it means they will have less interest to deduct but they may not need more deductions. It all depends on the individual situation.
You Create Predictable income With Higher Returns.
Banks make money by borrowing cheap and lending high. They may pay 1-3% to you on your savings but charge 5-6% for loans. The difference “spread” is how they pay for those fancy buildings, carpet in the offices and fountains in the lobby. When a seller provides their own financing they have the opportunity to take the profits the bank would have made and put it in their own pocket. If the seller has savings which are earning at a smaller rate than the buyer is willing to pay for an owner financed loan, the seller may be able to double or triple the return on their money. This can make a significant difference with the kind of money involved in the typical house purchase.
You May Defer Taxes from the Sale.
Seller financing can provide some tax benefits by spreading out a large gain over time. If the seller structures the loan as an installment sale, there can be certain tax advantages to the seller as well in terms of the timing of recognition on the capital gain. If you have lived in your primary residence for 2 out of the last 5 years, there will be no taxes owed upon the sale for the first $500,000 if the sellers are married and file a joint return. For single filers with the same criteria, the exemption dollar amount is lower. For investment property or on primary residences that don’t meet the 2 out of 5 year rule, taxes will be due on the gain or profit based on the actual time you have owned the property. If you owned it less than a year, your gain will be taxed as “ordinary income” and added to the other ordinary income you earned in the same year. If you owned the investment property for more than 12 months, you would have a choice of how and when you pay taxes on the gain. You could 1) pay taxes on the gain based on “capital gain” preferential and reduced tax rate or 2) elect “Installment Sale” treatment for your gain and pay taxes as the money comes in annually over the life of the income from any seller financed note or 3) elect to delay paying taxes on the gain through another preferential tax called Section 1031. There are numerous hoops to jump through for the 1031 but you are allowed to roll your profit into the next house purchase and pay no taxes today on the gain of the house. You will need to involve a 1031 Facilitator or CPA to accomplish this tax deferral.
You Can Plan When You Will Receive Your Equity.
The terms of a seller-financed loan look similar to those of a conventional loan; however, a seller has a great deal of freedom in setting the terms, such as the interest rate and the duration of the payment period. For instance, a seller might wish to provide seller financing as a short-term arrangement over five years, after which the borrower is expected to refinance the loan. Timing your “balloon” payment might be structured to coincide with a future cash need such as retirement, college tuition or really anything that might come in the future.
You Dramatically Reduce Closing Costs.
In today’s lender environment, Sellers often have to pay for the Buyer’s cost of acquiring conventional financing. I have personally paid over $7,000 for a $105,000 loan in loan cost on behalf of the buyer just to be able to sell my house! Associated with a traditional loan closing, there are costs for loan origination, underwriting, loan document preparation, points, surveys, appraisals, home inspections plus more. Most of these costs are eliminated or reduced with Seller Financing. A typical seller financed closing would have Seller’s attorney fee that would include the document preparation and recording fee. That’s all!
Your Heirs Can Inherit The Seller Financed Note After You Are Gone.
Many Sellers are concerned that their heirs will blow the money after their death. With Seller Financing, if the Payee (secured party-YOU) passes away prior to the complete payout of the loan, the loan is passed on to the designated heirs. They would receive the payments just as the original lender till the term of the loan is completed. The heirs could be a surviving spouse, children, grandchildren or even a charity. It is a way of providing an income stream to those you love after you are gone.
You Can Sell The House “As Is”.
Because of physical problems of the house or deferred maintenance, some houses cannot be financed through conventional methods without making repairs. This is especially true with roof or foundation problems. Offering seller financing often eliminates the required repair expense paid by the seller. We always buy in “As Is” condition but need a few days to make our own inspections after an agreement has been made between the Buyer and the Seller. Often a willing buyer has the skills to make the repairs out of their pocket. One recent seller found out they had a mold problem prior to closing. In this case, the price was adjusted and the Buyer completed the repair.
You Can Control the Sale Date and Date of Possession.
Many sellers want to know that there is someone committed to buying the house so that they can make other plans. Once a seller and I signed a Purchase Contract with a seller financing and a balloon date one year after closing. This allowed the Seller to build a house with the certainty that their house would be sold. How did they know? They knew because they were in control of the timing of the payment of their equity.
You Can Sell or Trade your Note & Convert some or all of it to Cash.
After the Buyer (borrower) has a track record of timely payments, it is possible to sell the note for a lump sum cash amount. Be sure to keep copies of all checks or money orders the borrowers make.