Seller Financing for Higher Sales Price and Passive Income
Executive Summary: In today's tough real estate market, high interest rates, inflation, and job insecurity make buying and selling homes challenging. Seller financing offers one solution by allowing sellers to finance the sale of their property directly, making it easier for buyers to purchase. Seller financing provides seller benefits like higher sales prices and passive income but also comes with risks like buyer default and property maintenance. Clear agreements, automated payment and default scenarios along with regular inspections will mitigate these risks, making seller financing a viable option for successful transactions
Seller Financing for Higher Sales Price and Passive Income
Selling a home in today's real estate market is tough. High interest rates, inflation, and job insecurity make it hard for sellers to find buyers. But seller financing can help both sellers and buyers succeed. This method offers flexible terms and lower interest rates, which can make buying a home easier.
Three Market Challenges
1. High Interest Rates: When interest rates are high, fewer people can afford to take out a mortgage. This means there are fewer potential buyers, making it harder for sellers to close deals.
2. Inflation: Rising prices for daily expenses like groceries and gas mean people have less money to spend on buying a home. This reduces the number of buyers who can afford a house.
3. Job Insecurity: With the risk of job losses or reduced income, many potential buyers are hesitant to commit to long-term financial obligations like a mortgage.
What is Seller Financing?
Seller financing is when the seller lends money to the buyer to purchase the home. The buyer makes payments directly to the seller instead of getting a traditional mortgage from a bank. This can solve many of the current market challenges.
Types of Seller Financing, Contract for Deed, Lease Options and Wrap-Around Mortgages
Contract for Deed: The buyer makes payments to the seller over time (typically monthly), and the seller keeps the title until the full price is paid. Typically this occurs when the buyer makes a "balloon" or "lump sum" payment 36 or 60 months after the contract commences.
Lease Options: The buyer leases the home with an option to buy it later at a pre-agreed upon price. Part of the monthly payment goes toward the purchase price as "option consideration". Additional option consideration may be paid at the beginning of the lease as well to "pay down" the purchase price due later.
Wrap-Around Mortgages: The buyer makes payments to the seller, who uses these payments to pay off their own existing mortgage and keeps the difference.
Benefits of Seller Financing for Sellers, Higher Sales Price, Monthly Income and Tax Benefits
Higher Sales Price: Sellers can often get a higher price because they are offering financing. Is it not a satisfying thought in this current market to get your "asking price" or even a bit more because you are willing to finance the purchase of your property.
Monthly Income: Whether you're receiving contract-for-deed payments, lease and option consideration payments or wrap-around mortgage payments... the basic idea is that you're receiving monthly payments. These payments provide a regular income to you with the expectation of a "pay out" later on down the road.
Tax Benefits: Spreading out the income over several years can provide tax advantages. Of course you should consider counseling with your own tax advisor to validate these strategies meet your individual plan and needs.
Benefits for Buyers in Seller Financed Transactions, Lower Barriers to Entry, Flexible Terms, Quick Transactions
Lower Barriers to Entry: Buyers who can't or may not want (this mortgage won't typically show up on your credit report) to get a traditional mortgage can still buy property.
Flexible Terms: The seller and buyer can negotiate terms that suit both parties, like lower interest rates or flexible payment schedules.
Quick Transactions: Without needing bank approval, deals can close faster... much faster! A typical bank financed deal requires three to six weeks of approvals and underwriting. Seller financed transactions don't have these barriers. A seller financed transaction can close within days.
Risks of Seller Financing for Sellers
1. Default Risk: The buyer might fail to make payments, leaving the seller in a tough spot, especially if they need the money for their own mortgage payments.
*** Mitigation *** Sellers should carefully check the buyer's credit and financial stability before agreeing to finance. Clear default terms and foreclosure procedures should be included in the contract. Most importantly, pre-payment of several months (say four to six months) payments must be escrowed. The escrow agreement governing the disbursement of the funds monthly should be automated such that the pre-payment fund is replenished monthly and monthly payments are made automatically.
2. Maintenance and Property Management: If the buyer defaults and the seller takes back the property, it might not be well-maintained, leading to repair costs.
*** Mitigation *** Include maintenance and inspection clauses in the agreement to ensure the property is kept in good condition. Regular inspections can help monitor upkeep. Inspections should be scheduled in advance and available in person or virtually. One of the benefits to seller financing is to shift the burden of property maintenance and repair to the buyer. Making "up-keep" a covenant of the agreement between the parties subjects the buyer to a duty to keep the property in a manner consistent with both parties original desire and intent.
Risks for Buyers in Seller Financed Transactions, Higher Interest Rates, Balloon Payments,
Higher Interest Rates: Seller-financed loans may have higher interest rates, which can cost more over time.
*** Mitigation *** Buyers should compare interest rates of the seller financed deal against and traditional loan terms and negotiate the best deal with the seller financier.
Balloon Payments: Most seller financed transactions have a large payment due at the end of the term. For example a contract for deed transaction might be amortized over 30 years with a "balloon payment" due 60 months after commencing the contract. If buyers are not ready for this, they might default. The buyer under a seller financed contract is betting that they'll have equity in the property for two reasons. First they've been paying down the principal amount owed under their contract. Second, they are anticipating appreciation of the property over the 60 months they've been making payments on the property.
*** Mitigation *** Plan for balloon payments from the start, improve your ability to borrow money (e.g. improve your credit rating or income situation) to ensure access to refinancing options. Additionally, you'll need to consider "flipping" the house or contract at or before the time the "balloon payment" is due. Consulting with a financial advisor can help buyers prepare.
How to Implement Seller Financing (Sellers)
Assess Buyer’s Financial Health by checking the buyer's creditworthiness and ability to pay. It may also be important to escrow several months worth of payments and automate the disposition of those funds to you as the seller/financier.
Draft Clear Agreements that outline terms, payment schedules, interest rates, and what happens if payments are missed. The parties will want to be on the same page and have the same expectations related to performance and non-performance of the parties.
Legal Compliance under the contract and escrow agreements must follow state and local laws, in addition to the terms being acceptable to the parties.
Documentation should be centralized and "chatable" if at all possible. Regardless, keep thorough records of all transactions and communications.
How to Implement Seller Financing (Buyers)
Understand Terms, make sure you understand all parts of the agreement, including payments and interest rates and what happens if you are late or totally miss payment(s).
Financial Preparedness and execution on your part is vital. Lock yourself into performance by automating payments and insure you can meet the payment terms.
Seek Professional Advice from real estate professionals like home inspectors, real estate attorneys and appraisers and insurance folks.
So, knowing the benefits and risks associated with Seller Financed Transactions is one thing, but actually reaping the rewards and steering clear of the pitfalls is another. But don't worry, we are here to help.
I'm Tyler Dow, and I've been where you are.
I understand the struggle of seller financing and selling my property. That is why I founded P2P Realty. A place where Sellers like you can leverage my years of experience and my passion for bringing buyers and sellers together in a way the fosters collaboration and opportunity for both. Me and our team offer more than a closed deal (although that is always nice).... we provide state of the art technology and innovative yet tried and true seller financing strategies that will not only provide you passive income but also earn you more money that transacting your real estate traditionally.
