The Benefits of Seller Financing

By: Liz Moore

Share

There is a “tried and true” method of creative financing that is too often overlooked:  Seller held financing.  In essence, the seller holds the mortgage on the property, and finances it at negotiated terms for the new buyer.

Why would a Seller want to finance a sale, rather than taking their cash proceeds out of the property?  In a soft market, offering the flexibility of owner financing terms may enable a Seller to get a higher asking price for his or her property, sometimes even more than what would be considered “fair market value.”  Most buyers are willing to pay a premium for financing where they don’t have to qualify in the traditional sense. 

Moreover, the sale can probably be completed more quickly if the owner finances than a traditional mortgage company.  Lender financing, the appraisal process, underwriting guidelines, etc. can all slow down the settlement process. 

Lastly, although almost all Sellers *want* the cash proceeds from their sale, not all of them really *need* it.  If you were planning to re-invest the proceeds in an investment paying 4%, for instance, but you can finance for a new Buyer at 7%, then that’s a no-brainer.

 In some cases, taking proceeds in installments vs. a lump sum can actually provide tax savings because the gains will only be realized on the portion of the proceeds you receive in a given year.  You should contact a tax professional about the specifics, but don’t overlook the true yield and potential tax benefits.

 For the Buyer, the biggest advantage is easier qualification.  If there is a situation such as a divorce or medical issue that has tarnished a credit score, finding a Seller who is willing to hold financing may be just the ticket to restore good credit by making payments on time.

 And, in addition to a fast closing, there will be far fewer closing costs associated with Seller financing – no discount points or origination fees, underwriting fees, credit reports or appraisals, etc.  The savings can literally be thousands of dollars.