What are the benefits of seller financing in a real estate deal? We’ll demystify this topic in the following blog.
Hauseit is the largest For Sale By Owner and Buyer Agent Commission remit company, established in 2020 in New York. Well, one of the primary benefits of allowing or providing seller financing when you’re trying to sell your property is that it may expand the range of possibility of buyers.
Especially, if you know in advance that banks will not lend on your property because of various reasons. Perhaps, such as defects in the title city, violations liens or judgments.
Keep in mind, however, that purchase contracts typically stipulate that the property must be delivered free and clear of title and free of any judgments, liens or violations. As a result, you may have to negotiate with the buyer if you intend to finance the property and get away with it.
So, what’s a good example of this? Well, let’s say that an owner a few years back put a sauna into his home without getting the proper permits from the NYC Department of Buildings.
Therefore, the alteration was done without the proper permits and if found out could result in a violation from the Department of Buildings. This is clearly an issue and maybe discovered in a title search or not.
However, that’s if they find out about this and presuming that they do may not agree to lend on the property. So, therefore, if the owner knows that his or her property is unfinanceable but wishes to sell the property as is, anyway perhaps because it’s simpler. Well, an option might be to provide owner financing presuming that buyers are okay with this defect.
This greatly extends the range and the possibility of buyers because many buyers will require financing and only a very small subset of buyers will be able to purchase a property all-cash. Providing a seller financing expands the range of buyers in another way as well. Let’s say that banks will finance your property so it’s not an issue however by providing owner financing you do extend the possibility and range of buyers because there will be some buyers who can’t qualify for a conventional mortgage from a traditional lender.
Now, oftentimes this isn’t someone that you will want to finance either if banks have turned them down but in rare and specific examples it might actually be a great opportunity for you. For example, what if there is a buyer that makes a very high amount of income let’s say he or she is a senior Google software engineer let’s say a principal engineer which is one of the top-ranked positions at Google in the engineering division and let’s say this buyer makes two million dollars in income per year.
However, for whatever reason perhaps because of a high spending or extravagant lifestyle he or she hasn’t saved much and has only 10% in a down payment with no post-closing liquidity. As a result, let’s say many traditional lenders have turned him down for a mortgage.
Well would you finance this buyer if you could? Well, the answer is obviously yes. Especially, if you don’t have another buyer that is as qualified. Keep in mind that sellers can often structure an owner finance mortgage in many ways. It doesn’t necessarily have to be a 30-year term like a traditional mortgage.
It can be much shorter say 5 or 7 years with a balloon payment at the end structured in a way and with an understanding that this is more of a bridge loan so that the buyer will be able to get by, build up some equity and in a few years take out the owner financing with a traditional mortgage.
Another benefit of owner financing is that the underwriting process as you can imagine is typically much faster than that of an underwriting department at major banks and as a result and under writing and the closing process is significantly faster.
One more benefit to consider for sellers is that you will typically be able to negotiate a higher interest rate than a comparable mortgage from a bank due to the irregularity of the product and the illiquidity of it.
You typically can expect to negotiate one or two or perhaps even more percent in interest higher than a comparable mortgage. Don’t forget that if you need cash down the road there’s always the possibility that you can sell the seller financing, essentially, the mortgage to an investor.
Now keep in mind that this is a highly illiquid and esoteric market so the buyer pool won’t be quite that deep and if you do find a buyer the offer will most likely be for a significant discount of the face value or the principal of the loan.
For example, you might see offers for 60 to 90% of the face value of the loan. One last major benefit of granting owner financing is the advantage of spreading out capital gains over many years as the seller.
Especially, if you don’t qualify for some reason for the 1031 tax exchange if you are an investor or the primary homeowner tax exception if, for example, you haven’t lived in the home for at least two out of the past five years if for some reason you don’t qualify or perhaps just because you have capital gains in excess of what these exceptions would grant you then it might make sense for you to consider seller financing because it can be considered an installment sell.
Essentially, in an installment sale, you are getting your principal or you’re getting gains over a longer period many years and as a result, you can qualify for lower tax brackets each year because of your income from where your capital gains will be lower in each year if it’s spread out over many years. Anyway, we hope you found this blog helpful.
•It opens up the number of buyers because now you’ll be able to find buyers who might not normally be able to get bank financing.
•It gives you cash flow since the buyer will need to pay regular payments to you (just as they would need to pay regular mortgage 4 payments to the bank).
> Income Taxes
> Return on Investment
> More Buyers
> Faster Transaction Closing with Less Decision-Makers
> Note and Trust deed are Marketable
> Structure Customized to Their Situation
PROS:-Spread out capital gains taxes over time.
• Earn passive income on a consistent basis.
• Choose your terms.
CONS:- qualifying the buyer can be complicated and time-consuming.
• underwriting the loan and staying legally compliant can be complex.