If you own your home free and clear, or have inherited one with no mortgage attached, congratulations.
You are now privy to a unique world of options when you go to sell your property. In a way that traditional sellers with existing mortgages are not able, you have now opened the door for yourself to be able to offer a wide variety of financing methods, including seller financing, to a broader field of potential buyers, and even make a lot more money.
What is seller financing?
Seller financing means that a buyer agrees to purchase a property from a seller. Instead of going through a bank to finance the loan, the seller becomes the lien holder and collects payments from the buyer directly until the balance of the loan is paid off.
Why consider seller financing?
Bigger buyer pool – Lending regulations have tightened in recent years. Maybe a buyer has a non-traditional income source, or shaky credit from past issues but large assets. They may not qualify for traditional financing but still have the means and interest in buying a house. They may be looking for creative/different ways of owning a home. Why not capture them when no one else can?
Closed is Closed – Once the property closes, you, the seller, are no longer responsible for maintenance, taxes, or repairs. Of course you want to make sure that items like taxes and insurance are being paid. But those payments aren’t coming out of your pockets any longer.
Added Control – In a way, you’re doing a favor for the buyer. This means that you have a lot more control in setting the terms of the deal. You can help pick the interest rate, the terms of the loan, and even the sales price (appraisal not required). Obviously you do not want to engage in predatory lending, but you can still structure an agreement in a way that works best for your financial needs.
Added Income from Interest – As the mortgagor, you the seller, would not only set an interest rate for the buyer’s loan with you, but you would reap the benefit of the interest payments ON TOP of the sales price. On a fixed rate mortgage, payments for the first few years are almost entirely interest.
Example: On a $200,000 loan at 5.5%, the total amount paid each month for principle and interest would be $1,135.58. Over the course of the first year, the total amount paid by the buyer would be $13,626.96.
Of this, $2,694.18 would be applied towards reducing the principal balance owed.
That means that the remaining $10,932.76 would be money in your pocket as interest. And that’s just the first year.
Substantial Downpayment – Many seller financing deals are established under the notion that the seller is taking a big risk selling to someone that couldn’t get financing any other way. For this reason, it is not uncommon to have buyers provide a large downpayment. 20, 30, even 50% payment up front is a great incentive. Not only do you get a large chunk of money initially (to help offset expenses, or use as a downpayment on a new house for yourself, etc.), but this money is yours to keep regardless of what happens.
Resale in Case of Default – Even if you’ve set up the financing carefully, sometimes loan default is inevitable. But if the buyer stops paying, the situation can still have a happy ending. Not only would you have the downpayment and interest already collected, but you could also foreclose on the property and resell it. And maybe even re-sell it at full price.
So, if you are in a unique position in regards to your real estate, there are some powerful reasons to at least consider this option when selling property.
Of course there are numerous serious pitfalls to this type of transaction as well. Anyone considering a lease purchase is encouraged to consult with a real estate attorney and tax professional for a full analysis of risks before entering into an agreement.
Readers are encouraged to consult with an attorney before entering into any real estate contract, particularly one involving seller financing. This article is designed to address only a few of the many complex issues. Suggestions made are not intended as legal advice.
image courtesy of Robbie Biller