Seller financing means the property owner acts as the lender, collecting monthly payments from the buyer. Sellers can charge higher prices, access more buyers, spread out capital gains taxes, and keep negotiation flexibility on down payments and interest rates.
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Why would a seller sell seller finance? Isn't that super risky? Well, I'm here to tell you 6 reasons why they might. But first, what is seller finance? Seller finance is when the seller moves up the totem pole from landlord to bank. They sell the property, but instead of the buyer going out and getting a loan from the bank, the seller becomes the bank. Payments are made directly to the seller every month to pay down that principal balance. Which brings me to reason number 1: monthly income. If you are a seller and you would like to have money in your pocket every month, truly passive income, this is a great way to do it. You can structure it with a little bit of flexibility to where the payment amount that's coming to you every month matches your own personal needs. Number 2: a higher sales price. Because you are allowing someone to come in and make payments on it, you are a lot of times able to command a higher sales price for the property. So instead of getting market rents or even maybe below market rents because everyone seems to be lowballing right now, you can actually request that the buyer pay full market value or even a little bit above market value. Number 3: Tax benefits. This is one of my favorite reasons. Capital gains are costly, and a 1031 comes with a lot of restrictions. Selling via seller finance allows you to have some flexibility and reduce your tax liability. In fact, the payments are often taxed as ordinary income rather than capital gains. This can amount to huge savings for the seller. Especially if they're an investor. Number 4, more buyers, which means a faster sale. There are a number of buyers out there who are looking to purchase a home who maybe don't qualify for a traditional bank loan. Now that sounds scary, but realistically it could be because of valid reasons, like maybe they're on 1099 income, maybe they own a business and it's harder to document that income. This allows for selling via seller finance allows for a larger buyer pool, thus meaning your house gets sold faster. Number 5, we touched on this a little bit, but no property management. It's no secret that being a landlord comes with a lot of repairs, maintenance, management, staying on top of things. But when you sell via seller finance, You're not responsible for any of that. All of the maintenance and repairs go to the buyer from day one. And lastly, number 6: flexibility. What do I mean by flexibility though? There's a couple of different things that I wanted to highlight here. One, you're able to negotiate terms with the buyer. Do you need a bigger down payment? Or maybe you need a bigger monthly amount? Or maybe you just want good returns on your money and you want to charge a higher interest rate. These are all things that are negotiable and you can work with the buyer to, in order to get the terms that you need to fit your long-term goals. Additionally, what some sellers do is they sell via seller finance and then later sell the note. This allows them to cash out on some of that capital that's held up. This allows them to get a lump sum of cash if they need it in the future. So in essence, by selling via seller finance, The sellers aren't just doing the buyer a favor. It's ideal for a seller who's wanting to make smart moves, maximize their flexibility, and also maximize the dollar amount that they're earning for their property.
