Has your property been sitting on the market and you are looking for a way to get it sold? Offering owner financing is one way to stand out from the competition and sell a property that otherwise might not (or at least not for the price you are asking). But before going this route, you need to do your homework on the pros and cons. Here are a few to consider:
- Larger buyer pool - By offering owner financing, you open the door for more interested buyers. If your home has been on the market for a while – this could help generate the buyer you have been waiting for.
- Higher sales price – Because you are offering owner financing, you will have the upper hand and can command a sales price that is equal or greater than your asking price.
- Easier path to closing – Again, you are offering owner financing so you can negotiate to sell your property “as is," eliminating the need for potential costly repairs that conventional lenders might require.
- Tax breaks - You might pay less in taxes on an installment sale, reporting only the income received in each calendar year vs. the bulk amount as in a traditional closing. You may also be able to combine the installment sale with a 1031 Tax-Deferred Exchange for further savings.
- Return on investment – Thinking of putting the proceeds from the sale of your home in a money market account or another low-risk type of investment? The interest rate you charge with the owner financing usually carries a higher rate of interest than most typical investment options, thus you are earning more on your money. Let’s say you are selling a property for $100,000. You get full ask price because you are offering owner financing and you agree to a 6.5% interest rate with 15 year term and 10% down payment. At the end of the term you will have brought in $141,119 off of that 90k loan.
- Cash flow – Each month you will be getting a payment from the buyer of your property – adding to your monthly cash flow.
- Less time on the market - Owner financing attracts another pool of buyers which can help get your home sold faster.
- Lower closing costs - Because owner financing cuts out the bank, it saves both parties from having to pay certain closing costs. Closing costs such as transfer fees, recording fees, attorney’s fees etc. would still remain.
- Faster closing time frame – Because you don’t have to jump through the hoops of typical bank financing, you can close on the property much faster.
- Other – Owner financing will get you out of the monthly debt of carrying a property and give you the down payment you need for another investment…but you will still have opportunity to produce income from it.
- Possible foreclosure – You may not get the full credit or employment picture of the buyer, which could make default more likely. If the buyer does stop making payments, you will then need to initiate the costly process of foreclosure.
- Possible abandonment – To help get the deal done, you might require a smaller down payment. The buyer may abandon the property because of the minimal loss on their part.
- Existing mortgage? - Most mortgages have a “due on sale” clause that prohibits you from selling the home without paying off the mortgage. If they find out that you sold it they may require you to pay in full or they will have grounds for foreclosure. Make sure you speak with your mortgage company about owner financing if you do not own it out right.
- Buyer creditworthiness – It can take time before you can fully trust the buyer to pay on time every month. Only time will tell. Be sure to get a full credit report of the buyer to find out as much as you can before making a decision.
- Taxable Income – You will be making income each year off of the interest on mortgage loan…this is taxable.
In the end, owner financing can help get your home sold and can have many benefits for you and your buyer. Just make sure you are aware of the big picture. If you are offering owner financing, you should run a full credit check on the borrower, require hazard insurance on the property and include a due-on-sale clause. You should consult a real estate lawyer and obtain competent legal advice because there are financing, disclosure and repayment-term requirements that need to be met.
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*Disclaimer – this information is intended to help you learn more about owner financing but is not financial or legal advice. Please contact your legal/financial consultant before making a decision.