Why to consider Owner Financing?

Why would a buyer or seller want to use Owner Financing?

In yesterday’s post, What is Owner Financing, we examined the basics of how owner financing works. Today we will look at the advantages of this type of financing.

Currently, seller financing is not very popular. Interest rates for home loans are at an all time low – roughly 5% for a 30 year fixed mortgage. That’s a low interest rate! If a buyer were comparing conventional financing to using seller financing, they would be comparing the conventional loan versus the seller’s loan. That means a seller would have to compete with the current interest rates. The seller is loaning out their money, so they have to view it as an investment. How much interest will they make on their money and how long will it take the buyer to repay? You won’t find many investors who are willing to take a 5% return on a 30 year investment. For this reason, most buyers go out and get a conventional loan from the bank. In the 1980’s when interest rates were pushing 20%, seller financing was very popular. Sellers could lend their money at 10+% and the buyers were still getting a deal relative to the market. Of course, if the buyer or property can’t qualify for a conventional loan, then it is a different story! Let’s go through the potential advantages for the Buyer or Seller.

Advantages for the Buyer

The buyer does not have to qualify for a traditional loan. The seller will qualify the buyer and may use different standards than a traditional bank. This may help someone repairing their credit, someone who is self employed, or someone going through a personal situation that prevents them from obtaining normal financing.

The Buyer cannot make the required down payment on a traditional loan. The buyer may need to make a large down payment on top of their traditional financing. If the traditional lender allows it, the seller can seller finance part of the down payment in the form of a second mortgage.

Lower closing costs. You don’t have to pay the bank to originate the loan, which is normally a large chunk of the Buyer’s closing costs. The loan does not go on the buyer’s credit report. This is an advantage for investors who are trying to accumulate multiple rental properties. Their ability to qualify for additional properties can be hindered by having more home loans on their credit report.

The buyer needs a short term loan. The buyer may just need the loan for a short period of time and the seller will delay their pay day to move the property. For example, they buyer could be renovating the property and then they will refinance after the renovation. They could be waiting for a large bonus and at that time, they will pay off the 2nd mortgage from the seller. The house does not qualify for traditional financing. Maybe the property is unique or in need of repairs and does not meet conventional lending requirements.

Advantages for the Seller

They widen the pool of available Buyers. They can now sell the property to buyers with conventional financing and buyers who cannot. It also may allow them to sell a property that does not qualify for conventional financing.

Tax Advantages. I’m not accountant, but if the seller sells and gets all of their proceeds at closing, they have to handle the entire tax burden that year (of course they may not have one if it is a personal residence). If the seller finances it, then the do not have to pay income taxes on the amount they finance in the current year.

Invest their proceeds. Some sellers like to invest their money in something they know – their former property. The seller is getting a return on their investment that is essentially equal to the interest rate at which they lend to the buyer. If they feel like this interest rate is better than their other investment options or is a good diversification to their other investments, they may want to lend their money in this manner.

As I previously mentioned, the terms of owner financing are negotiable. I’ve helped multiple buyers and sellers through this part of the negotiation and am happy to do the same for you!

Justin Landis
Keller Williams Peachtree Road

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