Every Seller’s objective when selling a home is to get the biggest return on their investment. With all the time, payments, maintenance, and taxes paid on a property, sellers expect to get a significant return for their efforts. Owner financing, if used properly, can be a very lucrative options for sellers. There are many ways to increase your profit when selling a home via owner financing. Below we will discuss the top reasons sellers use owner financing instead of selling through a traditional loan.
Everyone has heard the old economic rule of supply and demand. Essentially, the less inventory of a product there is, the more valuable the product becomes. Think about a Babe Ruth rookie card that has been signed by the Great Bambino himself or a high karat diamond. These items would have more value because there are very few of them or maybe even one.
This principle holds true for financing terms on homes too. Although there may be a limited number of properties that are offering owner financing, there are many buyers that need owner financing to be able to purchase a home. A buyer may need owner financing options because they don’t’ have enough job history, have less than perfect credit, or maybe they can’t prove their income due to self employment.
There are many potential buyers with those circumstances and they are willing to pay a premium to sellers offering owner financing. This drives the value of the homes offering owner finance up. A seller will definitely feel the benefits of supply and demand. Offering owner financing will help Sellers get top dollar on their home.
Owner financing is a loan provided by the Seller of a property to the Buyer. Instead of the Buyer getting a third party loan, the Seller will provide financing directly to the Buyer. The Buyer will agree to make monthly installment payments over a specified time, at an agreed interest rate, until the loan is fully repaid to the Seller.
When a seller sells a home owner financing they are virtually acting as the bank. The main benefit of acting as the bank is the seller earns interest on the financing provided to the buyer. A large portion of every payment consists of interest and is strictly profit. A 30 year loan can yield you up to 360 payments of interest. The interest income is in addition to the equity payments received from the buyer. On a $100,000.00 fixed rate 9.9%, 30 year loan, you could earn roughly $213,000.00 in interest. You can start to see how this can add up pretty quickly.
Another great benefit of Owner Finance is tax deferment. Tax deferment doesn’t mean you don’t pay taxes, it just means you don’t pay taxes on the capital gains all at once. Since you don’t realize all the capital gains of the transaction in the same year, that will reduce your tax obligation per year for the life of the loan.
In order to calculate your capital gains per year of the loan, you must know your cost basis of the property being sold. The cost basis of the property is essentially your investment in the property. It is what you paid for the property plus all allowable costs approved by IRS which usually includes improvements, settlement costs, utilities, taxes and other costs.
For example, if you sold a house for $100,000 and you had a cost basis of $40,000, this gives you a capital gain of $60,000. If you spread the sale out over 30 years, this results in a $2,000 gain per year. Would you rather pay taxes on $2,000 or $60,000? This will depend on your business model but if you are looking for long term investments, this is definitely a big benefit.
One of the biggest complaints we always hear from landlords about property management is maintenance and repairs. We hear so many horror stories of how tenants destroyed landlords properties. Some scenarios are so horrendous that it scares landlords out of their rental portfolios.
A great benefit of owner financing it is an actual conveyance of property. What does that mean? Well, it means you are no longer the owner as you are when you rent a property. This eliminates the responsibility of taxes, insurance, liability, maintenance, and make ready repairs a rental requires. How would you like to make more cashflow and have less responsibility? It’s a no brainer. This is a huge benefit to owner financing. Why have all that stress? Let the “owner” of the home deal with it.
Different sellers have different exit strategies when it comes to selling. If you are looking for a home run and looking to net a huge profit all at once, owner financing may not be for you. But if you are looking for the biggest profit and don’t mind receiving it over a period of time. Owner finance might be the perfect vehicle for you.
One of the big benefits of owner finance is consistent income. Receiving a payment like clockwork on a monthly basis is great for some sellers and is more valuable than getting all their payment at once. This can supplement your monthly income and stabilize your monthly budget or help you save money for retirement or other investments.
As you can see owner finance has many benefits. Knowing how these transactions work can help you make the decision whether owner finance it right for you. If you have questions about how you can conduct an owner finance transaction, call one of our real estate attorneys to get more information today.