Seller Financing As Investment Tool
Seller financing can be an effective strategy that often nets additional activity on listed homes. As a seller, you can “play the bank” to include potential customers that may be willing to finance with you instead. If you don’t need to cash out all your equity at closing, then cash flow as receipt of monthly payments may be an attractive option.
Known as “carrying the paper” or “holding the note”, a seller can offer any interest rate to fit the buyer and the investment strategy. Buyers will not have loan fees and you define the qualifying terms since you are offering the (albeit) un-conventional loan, pun intended. This type of financing enables strong borrowers who may not have a high down payment to get a home and they may be willing to pay a higher interest rate for the luxury of being able to do so. Or it could help a weaker buyer who may not otherwise qualify but you want to help out.
In essence, you would keep the title as the lien holder on the mortgage on the property as filed with the County, just as a bank does. If buyer defaults, you foreclose and recoup unencumbered ownership.
When buyers see they can be saving thousands of dollars on loan fees and can qualify where they may not, they’ll be much more willing to meet a seller’s price – and often even more. Investors, many of whom are saddled with limits by the secondary mortgage market, are drawn to private contracts and seller financing. This huge pool of customers often “turn properties” after short-term remodeling. When the home resells, the original seller can receive all remaining cash due.
While there may be no tax due on the principal portion of the monthly payment, the interest received will be subject to federal income tax. Since I am not a CPA and not licensed to give tax advice, I encourage you to consult your tax adviser as part of the preparation for this type of home sale.
To learn how to structure a sale by offering seller financing, contact me at [email protected] or 206.399.3641.