What are the benefits to seller financing in a real estate deal?
We’ll demystify this topic in the following video.
My name is Chris at Hauseit.
Hauseit is the largest For Sale By Owner and Buyer Agent Commission remit company, established
in 2014 in New York.
Well one of the primary benefits to allowing or providing seller financing when you're
trying to sell your property is that it may expand the range of possibility of buyers.
Especially, if you know in advance that banks will not lend on your property because of
various reasons.
Perhaps, such as defects in the title city, violations liens or judgments.
Keep in mind however, that purchase contracts typically stipulate that the property must
be delivered free and clear of title and free of any judgments, liens or violations.
As a result, you may have to negotiate with the buyer if you intend to finance the property
and get away with it.
So, what's a good example of this?
Well, let's say that an owner a few years back put a sauna into his home without getting
the proper permits from the NYC Department of Buildings.
Therefore, the alteration was done without the proper permits and if found out could
result in a violation from the Department of Buildings.
This is clearly an issue and may be discovered in a title search or not.
However, that’s if they find out about this and presuming that they do may not agree to
lend on the property.
So therefore, if the owner knows that his or her property is unfinanceable but wishes
to sell the property as is, anyway perhaps because it's simpler.
Well, an option might be to provide owner financing presuming that buyers are okay with
this defect.
This greatly extends the range and the possibility of buyers because many buyers will require
financing and only a very small subset of buyers will be able to purchase a property
all-cash.
Providing a seller financing expands the range of buyers in another way as well.
Let's say that banks will finance your property so it's not an issue however by providing
owner financing you do extend the possibility and range of buyers because there will be
some buyers who can't qualify for a conventional mortgage from a traditional lender.
Now, oftentimes this isn't someone that you will want to finance either if banks have
turned them down but in rare and specific examples it might actually be a great opportunity
for you.
For example, what if there is a buyer that makes a very high amount of income let's say
he or she is a senior Google software engineer let's say a principal engineer which is one
of the top-ranked positions at Google in the engineering division and let's say this buyer
makes two million dollars in income per year.
However, for whatever reason perhaps because of a high spending or extravagant lifestyle
he or she hasn't saved much and has only 10% in a down payment with no post-closing liquidity.
As a result, let's say many traditional lenders have turned him down for a mortgage.
Well would you finance this buyer if you could?
Well, the answer is obviously yes.
Especially, if you don't have another buyer that is as qualified.
Keep in mind that sellers can often structure an owner finance mortgage in many ways.
It doesn't necessarily have to be a 30-year term like a traditional mortgage.
It can be much shorter say 5 or 7 years with a balloon payment at the end structured in
a way and with an understanding that this is more of a bridge loan so that the buyer
will be able to get by, build up some equity and in a few years take out the owner financing
with a traditional mortgage.
Another benefit of owner financing is that the underwriting process as you can imagine
is typically much faster than that of an underwriting department at major banks and as a result
and under writing and the closing process is significantly faster.
One more benefit to consider for sellers is that you will typically be able to negotiate
a higher interest rate than a comparable mortgage from a bank due to the irregularity of the
product and the illiquidity of it.
You typically can expect to negotiate one or two or perhaps even more percent in interest
higher than a comparable mortgage.
Don't forget that if you need cash down the road there's always the possibility that you
can sell the seller financing, essentially, the mortgage to an investor.
Now keep in mind that this is a highly illiquid and esoteric market so the buyer pool won't
be quite that deep and if you do find a buyer the offer will most likely be for a significant
discount of the face value or the principal of the loan.
For example, you might see offers for 60 to 90% of the face value of the loan.
One last major benefit of granting owner financing is the advantage of spreading out capital
gains over many years as the seller.
Especially, if you don't qualify for some reason for the 1031 tax exchange if you are
an investor or the primary homeowner tax exception if, for example, you haven't lived in the
home for at least two out of the past five years if for some reason you don't qualify
or perhaps just because you have capital gains in excess of what these exceptions would grant
you then it might make sense for you to consider seller financing because it can be considered
an installment sell.
Essentially, in an installment sale you are getting your principal or you're getting gains
over a longer period many years and as a result you can qualify for lower tax brackets each
year because your income from where your capital gains will be lower in each year if it's spread
out over many years.
Anyway, we hope you found this video helpful.
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and of course if you're buying or selling property in New York we can help you save
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