For home buyers looking to pitch the idea of seller financing to sellers, it’s essential to know how the seller can benefit from such an agreement. With more flexibility, buyers and sellers can negotiate better terms, and sellers can earn safe and reliable passive income. This article looks at advantages for sellers, tips on how buyers can approach sellers, and how HonestDeed can help with during the process.
What is Seller Financing?
Seller financing works as a transaction where a homeowner agrees to enter into a financing agreement directly with the buyer without using a bank or lending institution. Rather than having a bank lend money, buyers can directly negotiate terms with the homeowner. With more room to negotiate and no involvement from the traditional parties like banks, seller financing is an excellent option for anyone looking to break into the housing market.
4 Advantages Buyers Should Mention to Sellers
1. Passive Income
As a buyer, the benefits of seller financing might seem obvious, but not for some sellers. When buying a home with seller financing, there’s an almost unspoken benefit most sellers don’t know about: passive income. Without even having to lift a finger, the seller can be earning money, even while they sleep. Not only are they earning passive income, but they’re earning it on equity they already own. What this means, is this becomes a much safer option since the seller is the first lien holder (in case of a default, liens will be paid according to when each lien holder recorded their lien; the first person to have recorded their lien will be paid first, and so on). With other investment options such as stocks and ETFs, you are usually not the first lien holder meaning they may not get access to their full investment in case of a default. As a buyer, it’s important to remind sellers of this often-forgotten potential income stream.
If you’re still unsure how to position it, let’s look at the numbers.
Bill has a house he bought over 20 years ago with no mortgage left. Now Bill thinks it might be time to retire, downsize his home, and possibly put some money away. Then comes Alice, who offers to buy the house for $500,000 with seller financing. Alice offers a down payment of $50,000 upfront and takes on the remaining $450,000 loan with a 7% interest rate for 30 years.
With Alice living in Bill’s old house, he’s now making $2,993.86 every month for the next 30 years, without even lifting a finger. After 30 years, Alice will make her final payment. Bill will have his money, Alice will have her home, and everyone will ride off into the sunset. Now that’s a happy ending.
2. Major Tax Benefits
There are tax benefits for sellers when they choose seller financing. One note to make is that the sale would need to be an ‘installment sale’ to see the tax benefits from seller financing: the buyer makes payments to the seller over time, rather than handing over a lump sum at closing. As the seller receives the installment payments, their capital gains are usually unrealized over several years. Small, monthly payments result in a much lower tax rate than if they were to receive a lasrge one-time lump sum, which usually happens with when using a traditional provider.
3. Flexibility & Security
For sellers, seller financing might be the answer for anyone trying to transition their living situation, such as downsizing due to retirement. Without the involvement of the banks, both buyers and sellers can work out a deal that works for them and their situations. With fewer restrictions, lower costs, and more flexibility, these benefits are great for buyers and sellers looking to make a change.
In addition, the seller should know they are fully secured in the event that the buyer defaults. The seller acts like a bank in an seller financing agreement and therefore is the first lien holder (meaning the ‘loan’ the seller provided to the buyer is secured with real estate as collateral). The seller can legally force a sale of the property and gain back the title.
4. Investment Property
Although seller financing isn’t the most typical path, it can still be a very profitable one. Sellers can charge a higher interest rate to help cover their loan and any risk. For home buyers out there, it’s a good idea to point out that although it’s uncommon to use seller financing to enter real estate, there a plenty of benefits to use it.
3 Tips on How to Approach a Seller
When approaching a seller, keep in mind that some sellers have either never considered using seller financing or understand the mechanics of the agreement. Below are three tips on how to approach these types of sellers:
1. Get To Know Your Seller
Much of the real estate world focuses on relationship development, and people will do business with people they like — it’s as simple as that. For any home buyers looking to approach a seller, it’s a good idea to develop a rapport before trying to close the deal. Most sellers want to know who they’re doing business with and will walk out of a deal if the buyer is too aggressive with their pitch.
2. Do Your Research
As a buyer, it’s essential to do your research on the property you are interested in. The more confident you are, the more the seller will share that confidence. It is good to know these details:
- How much the property is worth
- How much interest the seller can expect
- How long they could earn this passive income.
Do your homework and know the numbers. We will be offering a calculator on our website soon to help. You can print the summary and share it with the seller. This will give the seller the opportunity to review the numbers and see the benefits of seller financing. Sellers will love you for it, and it will increase your chances of securing your home.
3. For Sale by Owner (FSBO)
Always be on the lookout for properties listed as “for sale by owner.” You can search for these properties on Zillow, Redfin, MLS or in our HonestDeed app. It pays to look for new, just-listed properties. Who knows where that next huge opportunity might appear?
HonestDeed can help
You might feel like there aren’t many options in the housing market. The truth is that there is hope when it comes to buying a home. HonestDeed is changing the rules and rewriting the game when it comes to financing the purchase of a home. We’re here to help simplify the financing process. Visit our website to learn more!