The other day, I was talking with a relative who has been trying for months, unsuccessfully, to sell a house they own. It’s not rented out, not getting shown to buyers, and is costing them money all the while. They had been leasing it for $500 per month. They’ve been trying to sell it for over a year. That means they’ve said no thanks to about $6,000 and feeling frustrated and helpless this whole time. When I suggested owner financing, I was met with howls of dismissal, until I pointed out that it might be the only way they’ll ever get it sold.
Why Seller Financing Makes Sense
A seller might be willing to offer financing for several reasons:
- Make the property stand out and get it sold faster
- Increase the odds of getting full price
- Get enough for a down payment to buy another property
- Cover the monthly expense associated with owning the house
One huge advantage of seller financing is that you can almost always ask for a significantly higher price on the property and people will pay it.
In other words, seller financing doesn’t just benefit buyers who don’t qualify for (or don’t want) traditional financing. It also benefits sellers, especially those who are particularly motivated to sell their homes.
Sell Your Property Fast
Offering seller financing can open many doors to allow you to work with a much wider range of potential buyers. The fact is, a lot of buyers won’t even consider buying your property simply because they don’t have or can’t get the funds needed to purchase it. If you offer seller financing, you’re solving this problem right out of the gate.
The more flexible you can be and the more options you can offer to potential buyers, the faster you will get your property sold. On the other hand, if you’re only holding out for one lump sum, you could find yourself sitting on a property for a lot longer than you need to.
Advantages for Buyers
Seller financing has many advantages for buyers:
- The closing process can be faster. There’s always going to be the need for time to do the due diligence. But with seller financing, the closing process can be faster, because there is no waiting for the bank loan officer, underwriter, and legal department to clear the file.
- Closing costs are lower. Nobody has to pay the bank fees and appraisal costs.
- The down payment amount can be extremely flexible. Instead of having to meet a bank- or government-mandated minimum, the down payment amount can be whatever the seller and buyer agree to. However, for a lot of buyers, the interest rate is irrelevant IF they can afford the monthly payment. Why? Because without the seller to finance the property for them, they can’t do the deal, period. It’s all about making the property affordable for the borrower at a down payment and monthly payment they can live with.
- “Oh, that sounds complicated!”
It may sound complicated, the beauty is that you don’t have to manage the payment process. You don’t even have to pay to set up the service or the monthly fees to get the service. There are note servicing companies out there that do this all the time. I have three companies in my cell phone to recommend! And just like property management companies, note servicers are in the business of managing the loan paperwork and collecting fees and payments. They’ll even do auto payments on a monthly basis to a business account dedicated to that property, which you arrange.
- “But we need money NOW!”
Investors usually refinance their properties at market rates with their own bank, taking the available equity out of the property before they offer to do seller financing. That’s how investors have money available to invest in the next property. Look at it this way, say you buy a home for $50,000 cash. You add $10,000 in cash for repairs and improvements, making the property worth $100,000. As an investor, you’d refinance the property for up to $70,000. That results in $70,000 in your pocket (replacing your original cash investment, (the $50,000 purchase costs+ $10,000 repair costs) and at this point you’re adding $10,000 in profit to your cache of cash. Nice, right?
- “That sounds risky. What if they stop paying?”
That’s part of the model and is taken into consideration in this business strategy. Using the previous example, you’ve already taken out your original investment ($60,000) + the profit ($10,000) and you were able to sell it with SELLER FINANCING for $100,000… Yay! The buyer usually gives the seller 10% down ($10,000) and you make sure he pays escrow to cover insurance and taxes when the bills come in. (By the way, the note servicing company pays insurance and tax bills when they come in as part of their fee). Now, say the buyer makes payments for a year at $1,000/mo x 12 = $12,000, but in month 13, they fail to pay.There’s usually a 5% penalty and a monthly penalty after that. The note servicer will usually ask if you want to begin the foreclosure process. You say yes after the second month. They’ve only missed two payments ($2,000), right? Do you think you have to give the down payment, ($10,000) or any of the other payments back? No. You keep those. Is there insurance in place to fix any damage? Yes. They were paying the insurance payments out of the escrow account that the note servicing company managed! And you are a named insured on that policy.
- “Why would anyone buy a house that way?”
Let me ask you a question. Were people buying houses back in the 80s? The interest rates were in the double digits, up to 18%, I’m told. There’s just something great about owning your own home. If one cannot or does not want to go through the process of trying to get a loan through a bank, then seller finance is usually their next choice. It’s often their preferred choice!
- “I don’t want people tearing up my house.”
First of all, it’s not your house. It has become your investment vehicle. You’re thinking of selling it, because you have another place to live and you don’t need or want it. Someone else does. Second. The buyers will have been paying for the insurance the whole time with the seller/lender (you) listed as an additional insured. You can make a claim after you foreclose and get it all freshened up. (The note servicer can help with that or can refer you to someone who’s in the business of doing these kinds of repairs).You get the house back, and you keep all the money that you were paid, including the down payment, payments on the property, and profit from the refinance. You can start all over again. It’s just business.We hope buyers will live these properties as their forever homes, as do they, and most of the time they do. But you were speculating that they would tear up their “forever home.” Why would the typical person do that? The answer is that most have pride of ownership and would never do that.
So, why wouldn’t you want to do seller financing now? Best wishes, and I hope this explanation is helpful!
PS: If you’re looking for a simple explanation of seller financing for buyers, check out Sue Ann’s recent post on our HermitsBuyHouses blog.