These days, a smart investor is almost required to think outside the box. Last month, I wrote about seller financing from the buyer’s perspective. This month, we will discuss seller financing from the seller’s side.
A seller-financed real estate sale is simply a real estate transaction where the owner of the property (seller) acts as the ‘bank’ or lending institution. The seller sets the sales price, determines and accepts a down payment and then finances the remaining balance. Once the seller and the buyer agree on the terms, such as interest rate and amortization term, the transaction closes. From here, the buyer sends the seller monthly payments for the home he/she has just purchased.
Last month, I spoke with a Realtor who complained about not being able to sell one of her prized listings. Seven months prior, she listed the home for $400,000 and hadn’t received a single offer. During the seven months, she lowered the asking price five times. The asking price was now $320,000. I asked her what the property would appraise for today and she said about $360,000. I told her to raise the asking price back to $360,000, run a nine word newspaper ad and she will most likely sell the home in 30 days. She took my advice and sold it in 35 days. How?
She convinced her seller to ‘carry paper’ or in other words, accept seller financing. Her nine word ad read: beautiful 3 bdrm, 2 bath, $36,000 down, $1,467/month. She sold the home in 35 days because she started thinking outside the box and suddenly made this listing stand out from all of the other listings. I explained that by offering seller financing, she will be taking a page from the car dealership’s playbook. Car dealerships only advertise down payment and monthly payment. There are many buyers out there who do not fit into our conventional loan guidelines yet who qualify to purchase a home. Let’s face it, terms sell!
Why would her seller offer financing? Sellers, like most of us, fear the unknown. But once you empower them with knowledge, they can make intelligent decisions. By offering seller financing, a seller can…
1. Attract more buyers. A larger pool of buyers is now eligible to purchase your home. A larger pool of buyers increases your chance for more offers. More offers means there is a better chance of receiving a higher sales price.
2. Receive a higher interest rate. A typical Note rate a seller will receive from a buyer will be 3-5% higher than the going market rate for a conventional mortgage.
3. Get a tax break. When you sell for cash, you may owe taxes on your entire gain. By receiving monthly payments, you will most likely only pay gains on the income received in each calendar year.
4. Close quicker. Realistically, it usually takes between 30-45 days to close a conventional loan. A seller-financed transaction can be closed in much less time, not to mention less time on the market.
5. Sell a unique property. Conventional lenders shy away from unique properties or properties that have some deferred maintenance. Seller financing is a great way to move these properties.
The downside to a seller-financed transaction for the seller is obviously the chance you will need to foreclose. To minimize this chance, a prudent seller will check their buyer’s credit and employment. In essence, the seller will become the loan underwriter as you would see in any bank or lending institution. In the end, the seller will be making an overall judgment as to the viability of their buyer.
Next month, we will discuss what sellers who sold their property using seller financing can do if they want cash instead of receiving monthly payments.