Have you ever been asked if you wanted to buy something before responding with an answer along the lines of, “I don’t have enough cash set aside for that purchase”? Well, when it comes to seller financing, that excuse no longer works. Keep on reading to find out why.
What is seller financing?
Seller financing is a method of selling a property to a homebuyer. When referring to residential real estate, it is also known as owner financing or “bond-for-title.” This type of deal requires that the seller essentially make a loan to the buyer. However, the only cash that exchanges hands is passed from the buyer to the seller. The buyer makes a down payment of some amount. The deal doesn’t end there though. The buyer then agrees to make monthly payments for a specified period of time at a given interest rate. All the while, the buyer gets to live in the property and almost call it their own. Generally, these deals work best for properties that are fully owned with no outstanding mortgage on them. In the case that there is a mortgage, things tend to get complicated.
Benefits of seller financing.
As an investor, there are many advantages of using seller financing as an exit strategy. Consider the following benefits:
Avoid maintenance and related responsibilities. In these types of deals, you are able to pass off general maintenance responsibilities to the tenant. Typically, you wouldn’t be able to do this as a landlord with a rental agreement. This means saved time and money.
Receive monthly cash flows. It’s all about liquidity. These cash flows come in the form of payments towards the value of the property. And don’t forget about the initial down payment too. In the case that the buyer backs out, you will also get to keep all of the proceeds received thus far.
Experience a feeling of stability. Due to the nature of this deal type, the buyer will generally want to continue making payments until the property is theirs. Knowing this, you can expect the buyer to make an even greater effort to meet payments.
Helps you in a seller’s market. In a market where sellers are fighting for the few homebuyers on the market, this can be an effective tool. It will help to attract others who may not have otherwise been able to consider homeownership.
Potential to earn more on the property. You can earn more on the property in the long run since interest is charged on the payments too. Therefore, you make money on the property, as well as through interest.
These are just some of the many benefits of seller financing from an investor’s perspective. Let’s take a look at some of the aspects of seller financing we must be cautious about.
Hesitations behind seller financing.
To some, seller financing has gained a bad name in the real estate investment industry due to bullying tactics by some property owners. For this reason alone, some companies stay away from this practice. The other major hesitation is that you must rely on the sole credit of the buyer. In the case that the buyer defaults, you may have to go through a foreclosure process and repair the property before you can put it back on the market. There could be all sorts of legal fees and potential repair fees based on the condition of the property. However, there are ways that you minimize the likelihood of default on behalf of your buyer, like increasing the size of the down payment.
So when would you need to use seller financing?
As we briefly mentioned, seller financing can be very useful in a seller’s market where competition to secure deals is fierce. This presents a unique opportunity to those who may not have otherwise been able to purchase a property. Ultimately, seller financing makes sense when its benefits align with your investing goals.
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