Investors always look for creative ways to purchase properties. An alternative to getting a loan from a bank or lender is to find a seller willing to offer seller financing.
Through this method, a buyer and a seller enter into a contract in which they agree on the down payment, the term of the loan, interest rate and other conditions. In this article we explore the many advantages an owner enjoys when providing seller financing.
#1 Seller defers and pays lower taxes
On a seller-financing transaction, seller pays taxes to the extent they receive payment each year.
The profit from the sale could take a seller to a higher income bracket. However, receiving the income in installments would keep the seller in a lower tax bracket at tax time. Higher-income investors have to pay an additional 3.8% of net investment tax. This is applicable to single individuals with adjusted gross income (AGI) of $200k or higher, and married couples with AGI of $250k or higher. Without seller financing, high-earners could be taxed at 18.8% or 23.8% versus 15% and 20%.
#2 Seller may receive full list price for the property plus an additional income in the form of interest
There is no doubt that a seller will have a higher chance of getting the listing price when offering financing. This is because buyers may not qualify for a loan and, therefore, may be willing to pay a premium in order to acquire the property. In addition, there is a plus in receiving additional income in the form of interest, which is established by both parties at the time of agreement.
#3 Closing will be faster
As many of us have experienced, lender financing can be a long process. In some cases it could take months, with contract extensions signed, and anxiety building up. And, just when the seller thought the closing date was around the corner, the buyer did not qualify for the loan and seller has to start all over.
Through seller financing, there is no requirement of an appraisal, underwriting, and all the other requirements that a bank establishes, making the process a simple one.
Seller financing provides a competitive advantage and will drive more interested buyers to the property, making the sale a smooth and fast process.
#4 Seller gets to keep the property if the buyer fails to pay
In a seller financing deal, the seller takes a purchase-money mortgage from the buyer. By doing this, the buyer promises to pay the seller, otherwise the seller gets to keep the property by foreclosing.
#5 Seller will receive a monthly check
This is the investor's favorite: Receiving a check in the mail without having to move a finger!
Happy investing and remember, do not let your fear stop you from investing in real estate!