There’s no doubt that selling your home can be challenging. Seller financing offers more flexibility, passive income, and outstanding tax benefits for sellers. This article looks at how some life events can trigger an owner to sell their home, the benefits to sellers of using seller financing, and how HonestDeed can help.
What is Seller Financing?
When buying a home, most people will go to the bank, apply for a mortgage, purchase a home, and continue to make payments for many years to pay back that loan. With seller financing, the seller acts as the bank to the buyer, and the buyer is responsible for paying installments plus interest to the owner.
What Life Events Can Trigger an Owner to Sell Their Home?
We know life can throw unexpected events at us that may require homeowners to sell their home. Seller financing provides many benefits when these life events occur. Below is a list of different situations where seller financing your home can be a great option:
Seller financing has a secret benefit for sellers with retirement around the corner: passive income. Without even having to lift a finger, sellers can make money easily, while the buyer is responsible for paying off the loan with interest. To many potential home buyers, this is a great deal: no rigid application process and faster closing time.
Imagine this: a buyer agrees to make monthly payments of $1,091 to the seller for just under five years. (This doesn’t include property taxes or homeowner insurance — those are separate payments). By the end of 5 years, when all is said and done, the property owner will have $65,460 in payments.
The decision to downsize your home can be a great way to free up cash that might be locked up in home equity and lower overall monthly costs. Seller financing can help by giving sellers a new income stream from their home. They can use the regular installments to pay off the rest of their mortgage, any other debts, or live off it.
Let’s take Dave as an example. Dave bought his home 30 years ago with no mortgage left on the property. He’s looking to retire next year and would like to downsize and free up some of his equity to live off. A buyer comes along and proposes seller financing, an option that Dave has not given much thought to before.
The buyer offers to buy the home for $250,000, with a down payment of $25,000 in cash. The remaining $200,000 has a 7% interest rate for a 20-year term. Now Dave’s over the moon, with the buyer’s monthly payments of $1,744.43 covering his expenses. Dave can now downsize into a new place, have peace of mind, and ride off into the sunset (if he likes).
A Need for Cashflow
With traditional, once the sale of a home is complete, the seller receives a one-time lump sum payment and nothing more. Seller financing offers sellers the chance to have consistent cash flow for years to come. The buyer is responsible for paying the mortgage, plus with the additional interest rates payment and savings from taxes, sellers will have more than enough money to use elsewhere.
Here’s an example how this works: A buyer is looking to purchase a historic home that doesn’t qualify for a traditional mortgage from the bank. The buyer works out a deal with the seller, paying $250,00 for the property with a $50,000 down payment.
The buyer finances the remaining $200,000 with an interest rate of 7% for a 15-year term. Giving the seller $1,798 in monthly payments. With this additional cash coming in, the seller can use the money for anything they need.
Inheritance is another life event where seller financing has benefits. In this case, it helps the seller get some passive income and lowers their capital gains tax. (When you inherit property and sell it, you typically owe taxes on any gains the asset property made since you inherited it.)
Let’s crunch the numbers and see how this looks.
Let’s say a home sells for $200,000, and the buyer pays 20% cash down ($40,000) with a balance of $160,000. With an interest rate of 8%, monthly payments result to $1,066.66. It’s a smart financial option for any sellers out there.
Life happens, and unexpected expenses come, which can add up quickly. As a form of cash flow, seller financing is a great solution for those unforeseen medical expenses. By selling their home, sellers can pay for medical expenses, such as long-term residential care and a have peace of mind knowing they have monthly additional income coming in.
In the case of divorce, which isn’t ever cheap, seller financing is a way to have one party buy out the other over several years. What happens here is the spouse that’s buying the property will pay the selling spouse regular monthly payments until their portion is complete.
A simple example would look like this: The divorcing parties have a mortgage loan with a principal balance of $150,000 and total equity of $150,000 in the property. The purchasing spouse will pay $150,000 to pay off the original loan and $75,000 for half of the home equity. To cover the selling spouse’s buy-out and equity, the buying spouse will pay $225,000.
Why You Should Consider Seller Financing
When it comes to seller financing, for many buyers who don’t qualify for a mortgage, the decision is simple. It’s a great alternative to breaking into the housing market. Below are three key benefits that every buyer should mention to sellers when approaching the topic of seller financing.
Additional Income From Interest Rate Payments
The interest rate for seller financing tends to be higher than what the bank’s charge, which is a big plus for the seller. The reason is that the seller is taking a risk by accepting many payments over time rather than a lump sum; to lower this risk, sellers usually increase the interest rate.
As a buyer, it’s good to be aware of this point, and when approaching a seller, go in with some examples to give them an idea. For example, a buyer might offer to pay the total list price with 20% down and finance the remaining with 6% interest over 20 years.
Usually, when it comes to selling a home, the seller will have to pay a high rate of tax on the lump sum they receive for sale. The benefit of owner financing is that the tax rate can be much lower; the owner can realize the capital gains over several years with the monthly payments. In the end, the seller keeps more money for themselves and pays less tax to the government.
Negotiate On Your Terms
Buyers and sellers can negotiate on their terms. With only two parties involved and no banks, there’s plenty of flexibility when finalizing the agreement terms. There’s more opportunity to discuss interest rates, payment schedules, and other conditions without anyone else to answer to — no banks or underwriters.
HonestDeed – The Seller Financing Platform
The traditional route to selling or buying a property doesn’t always work for everyone. HonestDeed has been working on simplifying this financing process, focusing on helping buyers and sellers enter into a direct home financing agreement.