Owner (Seller) Financing

With bank interest rates hovering at recent historic highs, owner financing is more attractive and promoted at this moment in the market. Buyers may be wondering why they would want to explore this option, sellers may be wondering why they would offer it, and both may be wondering how it works.

When the owner of a home for sale provides owner financing, they are essentially filling the role of a bank, with the buyer making agreed-upon payments to the seller. The terms of the financing agreement are settled during the sale of the property and are similar to those that the buyer might have when working with a bank. For example: interest rate, payment frequency, loan format, whether an escrow account is set up for insurance and property taxes, what happens if the buyer fails to make the payments, and so on.

The seller may choose to receive the payments directly, manage tax forms needed, and perform necessary accounting, or they may choose to have a contract management company handle that and just receive the proceeds.

ADVANTAGES TO THE SELLER

If the seller does not need the cash proceeds from the sale to fund their next purchase, this can be a great way to leverage their home asset to generate interest income, usually much more than what they could generate from a savings account.

In addition, if the seller is trying to avoid a heavily-taxable event from a home sale due to capital gains, receiving cash in a trickle instead of a flood may be advantageous. Verify your situation with your accountant.  

Either way, depending on how the contract is written, the seller retains the property if the buyer defaults, allowing them to sell it again at current market rate. They may have to go through a foreclosure process to do so, but that asset is retained.

ADVANTAGES TO THE BUYER

Although the buyer will still need to be vetted to the seller’s satisfaction, the underwriting obstacles are usually not as robust as when one gets a loan from a bank. Some buyers who haven’t been at their current job for long enough or have self-employment income can find traditional lending a challenge. With seller financing, the seller gets to decide their comfort level and can make accommodations to the loan terms while negotiating to minimize risk. For example, a seller requiring a higher down payment or interest rate to make up for an abbreviated credit history.

THE MATH

Let’s look at an example. In this case, we assume a sales price of $500,000. The buyer is putting down 20% and is amortizing the loan over 360 months at 5.5%, but with a balloon at five years:

If you do the math, you will see that the seller actually received a total of $606,111.77 due to leveraging that asset for five years instead of the $500,000 they would have received had the buyer used a lender at the point of sale. This is also a great solution for the buyer who may have had to pay 7% or higher plus additional fees were they to go the traditional bank route. In this case, the buyer saved $23,403.24 in interest alone.

Curious about seller financing options on the market right now? Want to know if this solution is a good one for you? Let’s talk!