Selling financing, where the seller is in effect the bank loaning the buyer the money to purchase the property that the seller is selling, isn’t particularly common (especially in times like now, where the monetary policies have eased and interest rates are low). But it does have its place and time, and knowing the pros and cons of seller financing can be helpful in your next real estate transaction.
Let’s start with the cons of seller financing, as the list is short.
- As the seller of the property, you’re foregoing the immediate payment of funds which could be invested elsewhere at a higher interest rate.
- If the buyer fails to make payments, you (the seller) will be forced to foreclose on the property, which could be expensive. This can be a lengthy process, during which you’ll need to pay for the insurance, taxes, and any HOA fees. Then you’ll need to make the repairs to bring the property up to a condition where it can be resold.
- You could become subject to regulatory restrictions, such as those which prevent foreclosures during the current pandemic and require mortgage forbearance.
If those potential downsides haven’t dissuaded you, let’s talk about the benefits of financing your next property sale.
- Since you’ve sold the property, you are no longer responsible for the costs of the home. The new owner is responsible for the maintenance, taxes, insurance, HOA fees, etc. This leaves you potentially with a very high ROI.
- You can secure a downpayment against the loan, which helps mitigate the risks associated with future repairs and maintenance you might need to make should the property go into foreclosure.
- You might be able to sell your home at a premium, to a homeowner who otherwise might not be able to finance the home purchase.
- You can earn a premium interest rate. In today’s market, I know real estate investors who are earning 7% to 15% on the outstanding balance of the loan.
- Seller financed loans are typically 5-10 years, which means that you’ll get your full balance sooner than a typical mortgage.
- You may be able to defer some if not all of the capital gains from the property sale over the term of the loan.
So how do you know if seller financing is right for you? Let the numbers answer that question. If the downpayment and interest rate offer a better return than you can find elsewhere for the same risk, then it might be the right choice for you. Of course, each situation is different … and everyone should consider consulting legal and financial advice before making a decision. If you ultimately decide that seller financing is right for you, there are plenty of online resources to help you navigate the process of setting up and maintaining the loan.