Pros and Cons of Seller Financing

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Pros And Cons Of Seller Financing

Why using Seller Financing can be extremely profitable…

The pros and cons of seller financing are often overlooked by many sellers. The seller financing approach to real estate is often profitable and a win-win situation for both parties, thus increasing the marketability of a property, but only when both parties understand the advantages and disadvantages of structuring deals in this manner.

Seller financed deals work great when:

  • The seller wants to sell quickly but also wants to receive a higher price
  • The seller does not want to receive cash due to the tax implications
  • The seller wants a steady stream of income that is often times more reliable than would be provided by renters
  • The buyer has little cash as a down payment
  • The buyer cannot qualify
  • The property will not qualify for a conventional loan
  • The buyer has maxed out their ability to obtain loans conventionally
  • The property’s appraised value is lower than what lenders are willing to lend

Pros To Seller Financing:

  • Higher sales price – Because of the easy access to financing and less hoops for the buyer to jump through, many times buyers are willing to pay more, or even pay over market value.
  • Tax breaks – the seller might pay less in taxes on an installment sale, reporting only the income received in each calendar year.
  • Monthly income – payments made from the buyer increase the seller’s monthly passive income creating a stream of spendable cash throughout the life of the loan.
  • Higher interest rate – owner financing usually carries a higher interest rate than a seller might receive in a CD account, money market or other low risk investment types. This equates to a greater and more predicable ROI for the seller.
  • Quicker Selling Time – owner financing attracts a different set of buyers. If a property is not selling under conventional methods, offering owner financing is one way to stand out from the sea of inventory and move a hard-to-sell property that otherwise might not sell
  • Eliminate repair costs – the property might be sold in as-is condition thus eliminating the need for expensive repairs that many conventional lenders would require:
  • Huge savings in closing costs
  • Attract a larger number of interested buyers
  • The seller doesn’t always have to wait for a lump sum – if the seller is anticipating the need for cash in a number of years, the seller and buyer can agree on a balloon payment of the remaining balance of the loan after a set number of years. This creates flexibility for the buyer and seller to specifically satisfy the needs of the situation.

Cons To Seller Financing:

  • Possible foreclosure – sellers may not get the buyer’s full credit or employment picture, which could make foreclosure more likely and the seller will need to initiate the costly process of foreclosure if the borrower stops making monthly payments
  • Possible abandonment – the seller could agree to a small down payment from the buyer to assist in the sale, only to have the buyer abandon the property because of the minimal investment that was at stake
  • Legal Counsel costs– of course who pays these costs is always negotiable it must be stated as an additional cost. It is recommended that buyers and sellers seek legal counsel when structuring seller financed deals to eliminate any confusion, and to protect both parties from unforeseen events that might jeopardize the buyer’s or seller’s financial positions.
  • Interest income is taxable

Seller financed deals can be profitable, but the parties must clearly understand the pros and cons of seller financing.  Quick Home Offers can provide you with multiple offers for your real estate using seller financing to create a profitable investment for you.  If you’d like to learn more, or would like a free, no-obligation, fast offer, visit us here.

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