Seller financing, which is also known as owner financing, is a real estate agreement where the seller underwrites and carries the debt on a property by extending a non-cash credit to the buyer that’s equal to the purchase price minus a buyer’s down payment. Without the involvement of a financial institution, the buyer and seller are free to negotiate the terms of the seller financed mortgage which can include the purchase price, down payment, monthly payment, interest rate, and years of finance. After closing and like a traditional mortgage, the buyer then pays the seller a pre-agreed price every month until the end of the seller carryback period.
Owners who finance real estate as the seller enjoy many more benefits than they would by selling through more traditional means. 1 notable advantage of owner-to-owner financing in real estate is that sellers achieve a more lucrative sale price. This alone makes carrying back a home loan very attractive to sellers. Nevertheless, there are many more advantages, and, in this article, we'll explore all the benefits of seller financing for property owners who are considering this option to sell their houses.
What’s in it for you
Although not the most prevalent way to sell, owners carrying loans in real estate is still quite common due to the variety of advantages carryback financing offers. In this section we highlight the top 9 benefits to sellers who offer houses for sale with owner finance:
In nearly all real estate transactions, the number 1 goal of a seller is to sell for the highest possible price. By offering seller financing, sellers can command more for their property, and it’s not even close. This primary owner financing strength to sellers is possible because the costs of conventional financing are eliminated for the buyer and the purchase price can be for a home’s projected value at a certain time in the future instead of its current value (banks will lend only based on current value). No matter the situation, these 2 factors result in a more profitable sale for the seller. Additionally, some investors who acquire properties with seller financing will often pay principal only monthly payments, and as compensation, the interest payments a seller would have otherwise received are loaded into the sale price.
→ Is selling a house via owner finance a good idea? With seller financing, Good Vibes Homebuyers can pay up to 150% of a home’s current value! Contact us to see how high a price we can pay you with carryback financing!
By providing seller financing options to buyers, owners accomplish 3 things: (a) they receive a large lump sum in the form of a down payment, (b) they establish a new and consistent stream of passive income, and to pay off the note in full (c) they receive another large lump sum at the end of the seller carryback period. Written differently, sellers benefit because they get paid 3 different ways. This regular infusion of funds can serve as a valuable supplement to a seller's finances, it can provide them with added financial stability, and it can even create the financial flexibility to invest in other income producing assets.
Another tremendous strength to sellers that finance the sale of a property are the tax advantages of carrying back a home loan. Rather than getting all sale profits in 1 tax year, which can push sellers into a higher tax bracket, sellers can spread out their tax liability over the term of the seller backed mortgage. For example, seller Sam bought his house for $100,000 but he now owns it outright and he agrees to seller finance it to buyer Bill for $300,000. Buyer Bill puts down 20% ($60,000) meaning that seller Sam is carrying back a loan of $240,000. Had seller Sam not understood the benefits of seller financing his home, at its sale he would have owed $40,000 in taxes. But because seller Sam did indeed realize the strength of seller financing, his tax liability was just $12,000 (a tax savings of $28,000).
As noted above, a few homebuying companies offer homeowners seller finance options which convert interest payments into the purchase price, which causes a much higher sale price. Structuring seller financing arrangements in this way is a good idea for sellers because the monthly payments are taxed at the capital gains tax rate instead of the personal income tax rate. Capital gains tax ranges from 0% to 20% while personal income tax rates can be as high as 37%. Even better, sellers in owner finance transactions are exempt from the tax reporting requirements of interest income.
It's no secret that it can be expensive preparing a house for sale on the open market. In the traditional sales process, sellers can expect to lose 7% of the sale price to sales fees, however, realtor commissions which average another 6% must also be deducted. People who buy real estate through seller finance agreements can help sellers circumvent these fees and commissions, as most willingly pay the seller’s sales fees, and don’t charge commissions. Before agreeing to seller finance real estate and enjoying its advantages, it's important that sellers also explore other potential savings as many buyers can save sellers even more by covering moving expenses or advancing a cash loan.
Buyers need sellers and sellers need buyers! Seller financing provides property owners the benefit of significantly expanding the pool of potential buyers. Conventional buyers can face challenges in obtaining a mortgage due to credit history, employment status, the deal’s debt service coverage ratio (DSCR), and other factors. With seller financing, however, these individuals can qualify as buyers based on criteria that are set solely by the seller. This broader accessibility inevitably attracts more buyers and ultimately enhances a seller’s chances of quickly finding a qualified buyer. Moreover, without the involvement of a traditional lender and their loan-to-value and DSCR restrictions, sellers can demand a higher sale price.
Just like how a conventional closing works, where a mortgage company underwrites a loan and later sells it to another lending institution, sellers have the flexibility to do the same. This means that owners can sell carryback debt at any time and for a profit. For example, a seller who owner financed their home to a buyer at a 7% interest rate can sell the note to an investor at a 5% interest rate, thereby allowing them to pocket a 2% spread on the interest payments. Another advantage of owning seller financed debt is where a buyer defaults. When this occurs, the seller gets to keep the buyer’s down payment, all monthly payments, and the asset itself! They then can start over the seller finance process again (and likely with an asset that’s appreciated significantly in value)!
Selling a home can be an extensive process that’s chalked full of obligations and emotions. In fact, the average time it takes to sell is 87 days: 52 days to field and accept an offer and 35 days to fund (Federal Reserve Economic Research Center). Despite this lengthy process, a high percentage of accepted offers fail to even close, costing sellers money and even more time. The benefit of accepting a seller finance offer is that sellers are in control of the timeline. From start to finish, owner to owner financing closes in an average of just 2 weeks. Highly regarded real estate companies can even close in as little as 5-days. Alternatively, the top investment companies who offer carryback finance options can even help sellers with a 5-day closing or the choice to close on the sellers timeline, even if it’s months away.
→ There are many other beneficial ways of selling real estate without negatively affecting the seller's schedule.
The 12 steps it takes to sell real estate on the open market is complicated. Sellers must clean constantly, endure showings, navigate the inspection and appraisal process, and complete repairs. Throughout each step, a mountain of paperwork must be carefully reviewed and even the smallest of mistakes can cost sellers hours of time and thousands of dollars. A strength of owner finance for homeowners who are selling is that buyers are often investors who handle all the paperwork and each of the 12 arduous steps it takes to sell. This benefits seller finance owners by lowering or even ending the stress of selling and frees up their time to focus on more important matters.
→ A fun fact about Good Vibes Homebuyers is that 76% of its closings are due to failed sales on the traditional market. Avoid the hassle! Contact us now to see how carrying back the loan on your home can benefit you!
How does seller financing work for sellers? And does it truly benefit owners who opt to carryback a loan on homes? Seller financing in real estate is not as complex as most might think. It instead comes down to 5 negotiable variables: (1) sale price, (2) down payment, (3) interest rate, (4) monthly payment, and (5) length in years.
Of these 5, sellers get to choose the 2 variables that are most important to them, however, this influences the others. For instance, sellers can choose a large down payment and large monthly payments which limits the sale price and interest rate and shortens the years of the owner carry loan. Conversely, a low interest rate increases the sale price and monthly payments and extends the seller financed term. Below is an example of 3 seller financing options for the same property that an owner could receive. Do you notice anything in particular? Our investors reveal to sellers their estimated profit because they believe in honesty and integrity and in setting up mutually beneficial seller financed deals.
Throughout our years of experience as residential investors, owners have asked many questions about how sellers financing houses is advantageous. Here, we share and provide answers to some of those more often asked questions about the strengths of seller financing for owners.
When in a buyers’ market or during an economic downturn, owner financing a home to the buyer is the only way for sellers to keep the sale price elevated.
When buyer financing falls through, it regularly results in deals falling apart and sellers having to begin the process all over again. To prevent such setbacks and ensure a quick and hassle-free sale, the following are the top reasons to sell a house by owner carryback: (a) want the most money possible, (b) want to avoid taxes, (c) want control over an asset without the responsibility of maintaining it, and (d) want passive income.
→ No matter your situation, benefitting from a smooth owner-to-owner finance closing starts with contacting Good Vibes Homebuyers for a free, 0 obligation and hassles offer!
It’s easy to understand why owners opt to finance the sale of homes to buyers. But why are buyers like Good Vibes Homebuyers incentivized to enter into this type of agreement? Like sellers, buyers also don’t enjoy the hassles of property inspections, appraisals, and bank approvals. Moreover, seller financing can reduce the amount of upfront capital a buyer needs to buy an asset which preserves funds for other investment opportunities.
When a seller has a mortgage, they still can offer buyers seller financing, though it’s a different kind of seller finance called a “wraparound mortgage”. This type of owner carryback means that the seller creates another mortgage that wraps around the exiting mortgage. The buyer then makes payments toward the new wrapped mortgage which pays the cost of the existing mortgage. This can be helpful to sellers, especially if they’re able to charge a higher interest rate on the wrapped note (because they can pocket the difference).
If you're looking to net the most money possible, agreeing to finance the buyer’s sale of your home is the way to bigger and better profits! Doing so allows owners to uncomplicate what is often a draining, aggravating, and time intensive process. The steps to sell your house and carry back the loan is simple with the right buyer and can render incredible profits that cannot be achieved in any other way. Contact Phil and Will at Good Vibes Homebuyers today to ask how a seller financed offer can strengthen your financial position!
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