Own a property Free and Clear (or with sizable equity)? Have you considered selling it with "owner financing"? Read some benefits and drawbacks here. We are here to help and can even purchase your home with owner financing.
BENEFITS OF OWNER FINANCING
WHY OWNER FINANCE?
There are many reasons a seller may prefer to owner finance. Below you may find some.
Get money now, money over time, and money later: If you decide to owner finance you may want to require a min of 10% down (aka principal reduction). This is highly recommendable if owner financing to an end user, owner occupant. It lessens the desire to “just walk away”. This is called “money now”.
The monthly payment you get each month is the “money over time” you get. This is nice, because its like a dividend or paycheck you get with out working.
The “money later” can happen when the buyer decides to refinance. Let’s say he still owes you $150K and decides to refinance to get a better rate. You would get a nice check from the title company for the $150K you are owed.
Avoid repairs: Because you become the “lender”, you don’t have to require the seller (aka “you”) make any repairs. If home needs repairs, this may help expedite a sell, potentially saving you thousands of dollars a traditional lender may require in regards to repairs.
Good investment: If you are wanting to help fund your retirement, selling with owner financing can be a great part of your retirement plans. You are now collecting “interest” instead of just getting payments. Over the life of the deal, you could stand to make more than you would just selling outright. Imagine the following scenario. You agree to sell your home and carry a $200K note at 6% for 30 years. That would generate you about $1200 p/mo. What could you do with an extra $1200 p/mo? And how much are you to stand making over the life of the loan?….over $430K! Isn’t that a SMART investment?
Avoiding the “Lottery Effect”: Most lottery winners seem to spend all or most of their earnings within 3-5 years, regardless of how much they win. This is called the “lottery effect”. To many, selling a home and getting a large lump sum of money can be like winning a small lottery. Friends and family may come out of the woordwork and “help” you spend the cash: “buy me a car”, “help me with downpayment on my house”, “I’m getting married and need help with the expenses”, and “can you just help us pay down our bills” become a common situation. Statistically, you are likely to spend all your money within 3 years. Selling with owner financing can avoid that. You aren’t getting a lump sum of money. Rather, you are getting cash every month. This can help keep “vultures” away and can help you improve your life on a monthly basis, without you having to be the bad guy and saying “no”.
Lump sum option: Let’s suppose you don’t need all the money now, or you come to realize the “lottery effect” is real and you want money over time. But let’s imagine that changes. Let’s say that 5, 10, 15, or 20 years down the line circumstances change and the monthly income just isn’t enough to cover large expenses you may encounter. Or let’s say you decide to pass the note to your family in your estate and they decide they don’t want to share a monthly income. Now what? With owner financing, you hold something very valuable – you hold an income producing paper asset. You can always sell the note or even a portion of the note to investors like ourselves or others. Bottom line, if you do need a lump sum later, you have that option. You’re not locked down to monthly payments forever.
Retain control: When you owner finance a home, you keep “one foot in the proverbial door” of the property. Should the buyer default, you can foreclose. In Texas, this is relatively easy. We live in a non-judicial state. If done correctly, in less than 42 days and with less than $1500 in attorney fees, you can foreclose. Texas is one of the easiest states to foreclose in the even of a default. When you do that, you keep all the money paid so far and receive ownership of the home again. It’s probably gone up in value. So while you sold the home for $200K 10 years ago, it might be worth $300K (or more with average appreciation of 5% p/year). You can sell it outright, rent it out, or owner finance it again. The choice is yours.
Sell faster and market to a larger pool of buyers: When you decide to owner finance, you are marketing to a larger pool of buyers and therefore the home tends to sell faster.
Tax benefits: We are not CPA’s and this shouldn’t be construed as legal advice (always consult an attorney) but owner financing may have positive tax implications. When you sell a piece of property with owner financing, it is considered an installment sale instead of a regular sale of real estate. For example, when you sell a house or a piece of land normally, the seller gives you a lump sum of money for the purchase on the closing date. With an installment sale, the buyer gives you a down payment on the closing date and then gives you regular payments over the life of the contract.
When you sell with owner financing and report it as an installment sale, it allows you to realize the gain over several years. Instead of paying taxes on the capital gains all in that first year, you pay a much smaller amount as you receive the income. This allows you to spread out the tax hit over many years. When you sell a property that has appreciated significantly in value, it could require you to pay a large amount of capital gains taxes.
When you end up selling your house through an installment sale, you must report the capital gain as it is received. To figure this out, you must know the cost basis of the property. The cost basis is the amount you paid for the property plus any sales expenses and improvements. You then subtract the cost basis from the amount you sold the house for. For example, if you sold a house for $100,000 and you had a cost basis of $40,000, this gives you a gain of $60,000. If you spread the sale out over 10 years, this results in a $6,000 gain per year.
If you are considering offering owner financing to a potential buyer of your house, the tax breaks can play a role in your decision. Before engaging in owner financing, you must consider whether the additional tax breaks are worth forgoing the lump sum that you could get from a traditional buyer. You will ultimately pay the same amount of money in capital gains taxes, so you may prefer to simply get the taxes out of the way and use your lump sum.
KEY TAKE AWAY: Although selling with owner financing can have many advantages, it is something that should be carefully considered. Always consult with a qualified real estate attorney to help you determine the best solution for you.
DRAWBACKS OF OWNER FINANCING
SOME DRAWBACKS OF OWNER FINANCING
Legislation: Under the Dodd-Frank Act new rules were applied to owner financing. Balloon payments may not be an option and you might have to involve a mortgage loan originator depending on the number of properties you owner finance each year.
Default: When borrowers miss payments, banks have collections departments to make phone calls and knock on doors trying to track down the money. Understand that if you provide seller financing, this becomes your responsibility. If worse comes to worst and the buyer quits paying entirely, it will also be up to you to foreclose. This is time-consuming and can be expensive. That includes not only the loss of income from the mortgage payments the buyer isn’t making, but also legal fees and the simple fact that a foreclosed property can lose value. The risk of foreclosure is another reason it’s smart to try to get a substantial down payment; borrowers are less likely to default if they have a lot of their own money sunk into a home.
The long wait: Sell your home to a buyer who has lined up financing the traditional way, and you get a check for the full amount of the sale price. When you sell with owner financing, though, the buyer pays you over time, which means you won’t see the full amount for years. Getting a sizable down payment from the buyer can take some of the edge off — although a buyer who can’t get a traditional mortgage might not have a lot of cash available. To shorten the payment period, many owner-financing deals provide for the bulk of the loan to come due as a “balloon payment” five or so years down the road. By that time, the buyer will have built equity in the home and will hopefully be able to qualify for a regular mortgage.
Repair cost: if you do take back the property for whatever reason, you might end up having to pay for repairs and maintenance, depending on how well the buyer took care of the property.
The ongoing headache: The house you sell isn’t “yours” anymore. But as long as the buyer still owes you money, as long as there’s a possibility that you might have to take the house back, you have a financial interest in the home. This is why traditional lenders are sticklers about making sure that the home is insured, that the property taxes are paid and that the home is properly maintained. You’ll need to stay up on these things, too. If the insurance lapses and the home burns down, the buyer can walk away, and you end up with neither the house nor the money. If the property taxes go unpaid, the local government can place a lien on the house, which gives the government first claim on the property — up to and including the right to seize it and sell it to get the tax money. And a home that falls into disrepair will usually lose value.
KEY TAKE AWAY: Although selling with owner financing can have some disadvantages, it is still something that should be carefully considered. Always consult with a qualified real estate attorney to help you determine the best solution for you.
SELL TO AN INVESTOR
SELLING TO AN INVESTOR LIKE OURSELVES IS A GREAT ALTERNATIVE TO THE DRAWBACKS OF SELLING TO AN END USER OWNER OCCUPANT, WHILE RETAINING MANY OF THE GENERAL BENEFITS OF OWNER FINANCING. DROP US A LINE AND WE'LL REACH OUT TO YOU TO SCHEDULE A TIME TO LEARN MORE!