Out of all purchases you might make in your life, a home is one of the biggest ones. When it comes to this big life decision, it might seem like there are only a few options for financing. But this isn’t true; seller financing is an excellent alternative that many sellers don’t always consider. This blog will look at seller financing, how it works, and how HonestDeed can help with this big decision.
What is Seller Financing?
With a hefty price tag, buying a home almost always involves financing, usually a mortgage from the bank. Some people choose to purchase a home directly from the seller. The main difference is that the seller receives payments rather than one big payout, with no involvement from the banks.
How Seller Financing Works
Every situation is different when it comes to seller financing, depending on the priorities of the sellers and buyers. Below is how seller financing typically works, with most situations following these steps:
- Buyer and seller decide on doing a seller financing agreement and discuss terms (down payment, interest rate, duration of loan)
- The seller decides if would like to move forward with the buyer
- Property inspections
- Time to negotiate and finalize the contract
- The contract is signed
- The buyer take possession of the house.
This process is much faster without the bank involving many underwriters, loan officers, and legal departments. The buyer and seller are the only two parties present, making seller financing a cheaper and faster option for selling a home.
The Advantages of Seller Financing
Consistent Cash Flow
Once the sale of a house is complete, whatever money remaining on the mortgage is due right away. However, in the case of seller financing, things are a bit different as there’s no traditional buyer’s mortgage; but in this case, the seller does get consistent cash flow.
What does happen, is that the seller is still left to pay off the remaining amount of money remaining on the house, using the regular payments from the buyer. With a consistent flow of periodic payments, the seller has the freedom to use this new form of cash flow to either pay off any debts, taxes, or anything else for many years to come.
Let’s crunch the numbers to get a better picture.
For example, the seller has an existing loan on the house of $240,000 with the bank at 7% for 25 years, leaving the owner with monthly interest payments of $1,696.27.
Now let’s say this seller decides to sell the property 10% above market value, at $330,000. In this case, the buyer and seller agree that the buyer gives a 10% deposit ($33,000) and takes over the loan of $297,000 with a 9% interest rate for 25 years.
The seller now has a cash flow of $2,492.41 per month in interest repayments, meaning they receive a passive income of $795.94, or $9,551.28 annually ($2,492.21 — $1,696.27 = $795.94 per month). If there are any maintenance costs, water usage fees, or anything else, the buyer takes care of them.
It’s A Lot Quicker
There’s no need to wait for the bank’s approval for the mortgage with seller financing, making the entire process much faster. In the end, it’s a win-win for everyone. The seller receives consistent payments, and the buyer receives their home sooner.
Since the seller is the lender, there aren’t as many restrictions as there are with a traditional mortgage. There are fewer hoops to jump through for buyers to secure the new home, whether that is credit scores, income level, or work history.
Seller financing becomes a very affordable option for sellers when the banks aren’t a part of the equation. The many fees the bank charges can quickly get out of hand when it comes to selling a property, making it expensive with so many parties getting their cut of the pie.
A Great Investment
It’s not uncommon for some sellers to eventually become real estate investors. Although seller financing isn’t the most typical path, it can still be a very profitable one. In some cases, sellers can charge higher interest rates to help cover their mortgage with some cash leftover.
With no involvement from the banks, seller financing provides a lot of flexibility and a lucrative option. Many sellers turned investors find that using seller financing can be a great way to save lots of money and negotiate better mortgage rates for themselves.
3 Ways of Selling a Seller Financing Property
1. Real Estate Listing Websites
Most real estate websites have a filter option for “seller will carry or owner/seller financing”. If you’re a seller looking to find buyers, posting your home on all major real estate listing websites is a good idea, as most buyers are actively using those sites.
2. Connect with Real Estate Agents
Real estate agents and brokers have a wealth of information, and it’s pretty likely they know several buyers who are actively looking to break into the real estate market. It pays to network as much as possible; who knows what’s around the corner.
3. Search For Sale by Owner (FSBO)
Putting a “For Sale by Owner” sign right on the front lawn is one of the easiest and sure-fire ways to get attention from serious buyers.
Determining A Buyer’s Trustworthiness
Trust is crucial for seller financing; many sellers want to ensure that they’re dealing with an honest, reputable buyer. A good rule of thumb is to be transparent when discussing credit scores, employment history, and income levels for any buyers out there.
Seller Financing with HonestDeed
For many buyers and sellers out there, seller financing might be the answer. Whether you’re looking to buy or thinking of selling your home, at HonestDeed, we’re here to help buyers and sellers get the most out of every deal.