This week we have been talking about exit strategies and one great strategy is selling a property with owner financing also, known as seller financing. Seller financing is a great option for investors that own the house free and clear and have someone interested in the house that may not be able to purchase with a traditional loan.
There are many pros and cons to this type of financing as well as there are many ways that the investor can structure the agreement. The beauty of this type of financing, in my opinion, is that you get to help someone who could not qualify for a traditional mortgage right now and give them the opportunity to become a homeowner. Another beauty of this exit strategy is that you can get more out of the house by leveraging an interest rate and receiving payment monthly.
Let’s break-down some pros and cons to seller financing.
- Wider range of buyers to sell to
- Property can be sold at a higher price
- Seller makes the agreement arrangements
- quicker and cheaper way of selling home
- typically short-term loan with a balloon payment
- can resell the “seller financing mortgage” note
- If the buyer defaults, the seller will have to conduct an eviction or foreclosure on buyer
- Loan- servicing could have an impact on taxes (seek professional advice)
- Fees from hiring a loan-servicing company
-If the buyer defaults, the seller will have to conduct an eviction or foreclosure on buyer
How does it work?
Normally, the bank is not involved in this kind of financing which gives the buyer and seller the ability to create their own promissory note. This promissory note will outline interest rate, payment schedule and amount, any consequences, obligations, terms, and responsibilities of both parties. This agreement is typically a short-term options for the buyer and the idea is that the buyer will refinance the property at a certain period of time. When the buyer refinances then the investor will get the remaining balance of the loan, in full.
***Please consult a real estate attorney to review all contracts. This may not be an option for everyone but, it could be a great option for some investors.