Creative Seller Financing

What is seller financing?

Seller financing, also referred to as owner financing, is a real estate transaction method wherein the seller acts as the lender, enabling the buyer to make payments directly to the seller over time instead of securing mortgage from a traditional financial institution.This type of arrangement can be advantageous for both sellers and buyers because it eliminates the costs of a bank intermediary.

For sellers, it offers the potential to expedite the sale process and achieve a higher sale price.

Key Takeways

• Owner financing is sometimes referred to as “creative financing” or “seller financing.”

• Typically, can reach seller desired purchase price and possible addition higher return.

• Seller financing subject to existing mortgage which means we will talk to your lender and explain we will be taking on future payments from now own but the seller will remain on the loan and transfer deed to the investor

• Seller financing can provide extra income to the seller in the form of interest or get their asking price when it can be difficult selling on the market.

• Seller financing can provide substantial tax advantages and keep your hard earned money in your pocket.

• Faster closing since no need for bank approval, appraisals, and lengthy underwriting

Understanding Seller Financing

Seller financing, is a real estate transaction method where the seller acts as the lender, allowing the buyer to make payments over time instead of obtaining a traditional mortgage from a bank. When a real estate investor presents this option to a seller client, it opens up a range of benefits that can make the sale process more efficient, profitable, and flexible.

A buyer might be very interested in purchasing a property, but the seller won't budge from a $350,000 asking price. The buyer is willing to pay that amount and can put 20% down—$70,000 that they gained from the sale of their prior home. They would have to finance $280,000, but they can only get approved for a traditional mortgage in the amount of $250,000.

The seller might agree to loan them the $30,000 to make up the difference, or they might agree to finance the entire $280,000. In either case, the buyer would pay the seller monthly, principal plus interest on the loan. These loans are more common when the buyer and seller are family or friends or are associated in some other way outside the deal.

Some Reasons for Seller Financing

• Both sides want to move fast. Due to the substantial documentation, underwriting, and appraisal procedures required for traditional mortgage processes, traditional loans can be time-consuming compared to owner financing.

• Higher Sale Price Potential: Buyers like me, who are investors, often value flexibility. Because seller financing saves me from bank fees and stricter loan requirements, I might be willing to pay a premium for the property, meaning you could net more than you would with a traditional sale.

• Steady Income Stream: Instead of getting a lump sum upfront, you’d receive regular monthly payments with interest. This can provide you with a reliable, passive income stream for years—potentially more total money than selling outright, depending on the terms we set.

• Tax Benefits: Spreading the sale proceeds over time through installment payments can help you manage your tax liability better. Instead of paying capital gains taxes on a big lump sum all at once, you’d spread it out, potentially keeping more of your money each year. (Of course, you’d want to check with your accountant on this.)

• Flexible terms. Owner financing enables more customizability of the agreement's terms. Depending on their unique requirements and preferences, sellers and purchasers might bargain over interest rates, payment plans, and other terms. This level of adaptability may not be possible with traditional mortgage lenders.

• Control and Security: You’d hold the note on the property, meaning if I don’t make payments, you can take it back. It’s like having built-in protection for your investment, all while earning interest along the way.

Advantages of Seller Financing

Owner financing can be especially advantageous in slow real estate markets or unique properties. In these cases, sellers may be able to command a higher selling price for their property by providing a financing option, making the property more accessible. As lenders, sellers can receive regular principal and interest payments from the buyer. This creates a stable and predictable income stream and can be beneficial for sellers seeking reliable cash flow.

Owner financing can expedite the sale process, eliminating the need for the buyer to go through the lengthy mortgage approval process, which is particularly advantageous in competitive real estate markets. This may help buyers close on the property faster, taking the property off of the market sooner than if the deal should stall out due to traditional financing.

Requirements for Seller Financing

An owner-financing deal should be facilitated through a promissory note with a Texas real estate attorney. The promissory note outlines the terms of the arrangement, including but not limited to the interest rate, repayment schedule, and the consequences of default.

Some do-it-yourself transactions can be fully managed by the owner, but assistance from an attorney is generally advisable to ensure all of the bases are covered so we always use our local real estate attorney for all transactions. Paying for a title search with a title company can be beneficial as well to establish that the owner/seller is, in fact, in a position to sell the property and that they can eventually release the title in exchange for financing some portion or all of the deal.

Are There Tax Implications for Seller Financing?

For the Seller:

• Installment Sale: Generally, the seller reports the gain from the sale of the property over the term of the financing, rather than all at once in the year of the sale. This can help spread out the tax liability and potentially keep the seller in a lower tax bracket. This is known as an installment sale.

• Interest Income: The seller will receive interest payments from the buyer, which is considered taxable income. However, this income is often taxed at a lower rate than ordinary income.

• Potential Capital Gains Benefits: If the property was a capital asset (like real estate held for investment), the seller might be able to take advantage of capital gains tax rates on the profit from the sale, which are often lower than ordinary income tax rates.

Both buyers and sellers should be aware of the tax implications of owner financing. Sellers may need to report interest income, while buyers might be eligible for certain tax deductions related to mortgage interest. If you are considering entering an owner financing engagement, consult your tax advisor.

Can Seller Financing Include a Down Payment?

Yes, owner financing often includes a down payment, typically negotiated between the buyer and seller. The down payment helps reduce the amount financed and provides security for the seller.

The Bottom Line

Owner financing is a real estate arrangement where the property seller acts as the lender, offering direct financing to the buyer. Instead of obtaining a mortgage from a bank, the buyer makes regular payments to the seller until the property is fully paid off. This alternative financing option can benefit buyers with getting the terms they want and sellers seeking a their desired price point.

Can Seller Financing Be Transferred to a Third Party?

In some cases, owner financing can be transferred to a third party like about investor associated with SAHS, subject to the terms of the original agreement and approval from the seller.

Understanding Seller Financing Subject to existing Mortgage

A prospective buyer has expressed strong interest in a property listed for $110,000. The seller, however, carries an existing mortgage balance of $100,000 and has encountered challenges selling the property through traditional channels due to necessary repairs. The buyer proposes a solution: assuming the seller's existing mortgage through installment payments made directly to the lender, coupled with a 10% down payment ($10,000). This arrangement would satisfy the seller's desired $110,000 sale price. This approach offers a potential alternative to a conventional cash offer, which, after factoring in closing costs, title fees, holding costs, repair expenses, potential lender fees, and transfer taxes, would likely result in a significantly lower net return for the seller. The terms of such an agreement, including loan duration, interest rate, and the timing of deed transfer, would need to be formally negotiated and documented.

Both parties would agree with the terms and price in which our local real estate attorney with create a promissory note explaining the promises, responsibilities and all terms of the loan agreed upon and recorded with the county clerk.