Pros And Cons Of Seller Financing
Why using Seller Financing can be an extremely profitable…
The option to utilize seller financing is often overlooked by many sellers. The seller financing approach to real estate is often profitable and can be a win-win situation for both parties, thus increasing the marketability of a property. This approach works best when both parties understand the advantages and disadvantages of structuring deals in this manner.
Seller financed deals work great when:
- The Seller wants to sell quickly, but also wants to receive a higher price
- The Seller does not want to receive cash due to the tax implications
- The Seller wants a steady stream of income that is often times more reliable than would be provided by renters
- The Buyer has little cash as a down payment
- The Buyer cannot qualify
- The Property will not qualify for a conventional loan
- The Buyer has maxed out their ability to obtain loans conventionally
- The Property’s appraised value is lower or higher than what lenders are willing to lend
Pros To Seller Financing:
- Higher sales price – Because of the easy access to financing and less hoops for the buyer to jump through, buyer are often willing to pay more, or even pay over market value.
- Tax breaks – The seller may pay less in taxes on an installment sale, reporting only the income received in each calendar year. You do have the option of recognizing the entire gain in the year of the sale if that is more beneficial to you.
- Monthly income – Payments made from the buyer increase the seller’s monthly passive income creating a stream of spendable cash throughout the life of the loan.
- Higher interest rate – Owner financing usually carries a higher interest rate than a seller might receive in a CD account, money market or other type of low-risk investment. This equates to a greater and more predictable ROI for the seller than other assets would generate.
- Quicker selling time – Owner financing attracts a different set of buyers. If a property is not selling under conventional methods, offering owner financing is one way to stand out from the sea of inventory and move a hard-to-sell property which otherwise may not sell.
- Eliminate repair costs – The property often can be sold in as-is condition; thus, eliminating the need for expensive repairs that many conventional lenders would require.
- Substantial savings in closing costs – There are no bank fees or appraisal costs. Seller financing can cover remaining closing costs, which require ready cash that some buyers lack.
- The seller can wait for a lump sum payout – If the seller is anticipating the need for cash in a number of years, the seller and buyer can agree on the down payment amount (since there are no bank or government minimums), amount of monthly payment, and the balloon payment of the remaining balance of the loan after a set number of years. This creates flexibility for the buyer and seller to specifically satisfy the current and future needs of the situation.
Cons To Seller Financing:
- Possible foreclosure – Sellers may not get the buyer’s full credit or employment picture, which could make foreclosure more likely and the seller will need to initiate the costly process of foreclosure if the borrower stops making monthly payments. Note that the seller retains title; if the buyer defaults, the seller keeps the down payment, any money that was paid, plus the house.
- Possible abandonment – The seller could agree to a small down payment from the buyer to assist in the sale, only to have the buyer abandon the property because of the minimal investment that was at stake. The best way to reduce this risk is to get as much of a down payment as possible, which gives buyers a stake in the home, making it less likely that they will walk away.
- Legal Counsel costs – Of course, who pays these costs is always negotiable, it must be stated as an additional cost. It is recommended that buyers and sellers seek legal counsel when structuring seller financed deals to eliminate any confusion, and to protect both parties from unforeseen events which might jeopardize the buyer’s or seller’s financial positions.
- Interest income on mortgage loan is taxable and could be complicated – Talk to a CPA about the tax implications of selling with owner financing vs. selling outright.
Seller financed deals can be profitable; however, both parties must clearly understand the pros and cons of seller financing. Lotus Investment Properties can provide you with multiple offers for your property using seller financing to create a profitable investment for you. If you’d like to learn more, or would like a free, no obligation, fast offer, visit us here.