what are The Advantages Of Seller Financing
When it comes to deciding whether to partake in seller financing to buy or sell real estate, there isn’t a "one size fits all" answer. Everyone's situation is unique. The most logical way to determine which direction to take is by comparing the advantages of seller financing to the disadvantages of seller financing. In other words the pros verses the cons.
It takes two to tango with seller financing. Both a seller and a buyer are needed. The advantages of seller financing offers benefits to both. As we go through
the advantages, it may seem there are more benefits for the seller. There are, but truth be told, there is more risk for the seller than the buyer with owner
financing. Seems only natural for there to be more favorable benefits for the seller.
So let's dive in and explore the advantages of seller financing.
Advantages Of Seller Financing For The Seller:
1. A bigger pool of buyers: The banking practices we saw in the early 2000's where banks would lend to anyone who could fog a mirror is over. Today's lenders have tightened their approval process making it more difficult for a greater number of buyers to qualify. This bigger pool of buyers gives a seller more buyers to choose from.
2. Marketing time can be shorter: Properties generally sell faster when using a "seller will finance" marketing approach as compared to a conventional
finance marketing approach. By offering a seller will finance approach, you expose the property to a greater number of potential buyers. Rather than boxing yourself in with just a conventional finance marketing strategy, you also add the pool of buyers we saw in advantage #1 above.
3. Higher selling price: When owner financing is offered, the sale price is often the full market value and sometimes more. As a seller, my personal
experience with owner financing confirms this. Although not a steadfast rule, I found by offering financing I often got a sales price about 10% more than
the sales price of a similar property with conventional financing.
4. You get the interest income: With seller financing you the seller are acting as the bank. The best part of that role is the interest income
you receive. Depending on the size and amount of the note, this interest income can be substantial. If you have ever paid mortgage payments, think about
how much interest you paid, particularly in the beginning of the loan compared to the principal paid.
5. Taxes are paid as income is received: An owner financed sale is considered an installment sale. With an installment sale the tax is paid only as it
is received. In other words, the tax is spread out over the term of the mortgage note. With a cash sale the income tax due is paid in the tax year that
the lump sum is received.
6. The real estate becomes security for the seller financed mortgage note: The property is used as collateral for the purchase. The seller can take
back the property if the buyer stops making payments. This is true for both private mortgage notes as well as bank originated mortgage notes.
7. A mortgage note can be sold for cash: Should the need arise, the seller can sell a note for cash today rather than waiting for payments over time.
Like most liquid assets, seller held mortgage notes or deeds of trust can be sold on the open market for cash.
Advantages of Seller Financing For The Buyer:
1. Fewer lending restrictions for the buyer: Compared to bank lending requirements and guidelines, seller financing is more flexible with regard to down payment requirements, credit history, debt to income ratios, and other underwriting standards. Although the buyer still needs to prove they can "afford" the loan, the seller has more leeway in approving the buyer without the restrictions of a traditional lender.
2. There are fewer closing costs: With seller financing a buyer isn't faced with expensive loan costs like loan origination fees, mortgage insurance
premiums or any of the unnecessary nickel and dime fees banks may charge. This results in more savings for the buyer which can be used to build equity in
the property.
3. Quicker closing time: With seller financing, the mortgage processing "red tape" of traditional mortgage lenders is mostly eliminated. The result is
a speedier closing time ranging from a normal 6-8 weeks to as little as 2-3 weeks.
When you consider the advantages of seller financing, it's easy to draw the conclusion that seller financing is a viable creative solution to financing
real estate. However, the caveat of risk should always be considered. To give you another perspective, please read Disadvantages of Owner Financing. As with any investment concept, always consult with the appropriate professionals to help you make a sound investment.
back to: what is a mortgage note
New! Comments
Have your say about what you just read! Leave me a comment in the box below.