Seller Benefits to Offering a Buyer Seller Financing
As the owner of a larger real estate brokerage that concentrates on property management and real estate investing, I have brokered many different types of deals and I have had the advantage being part of many transactions where I was able to learn from some really incredible investors. One thing I have learned along the way, is that many property sellers actively seek out seller financing deals.
In this real estate investing guide article, I want to take a hard look into seller financing, and why some property sellers use this strategy.
First, What is Seller Financing?
Seller financing allows the seller to use the equity in their property to provide a loan to the person buying it. The loan can be a small portion of the sale or the whole amount. The loan can cover a short amount of time (months) or an extended period of time (years). It all depends on how you, as the seller, wants to structure the deal.
The reasons many sellers choose this approach is that it provides some very distinct advantages to the property seller. Simply put the seller, capture far more profit than they would otherwise.
There are several nice dynamics working for the seller, with seller financing:
- Tax Breaks. The seller captures far more income through some pretty big tax breaks. For example, it allows the seller to avoid paying Capital Gains Tax. It’s an effective and legally encouraged way to defer paying IRS and state taxes.
- These tax benefits often beat the returns you can get in other forms of investing, like the stock market. You have the opportunity to earn a far higher rate of return, as opposed to more traditional forms of investment.
- There’s often a higher sales price associated with the deal. Because the seller offers financing, they may be in a position to command something closer to full list price.
- The closings are often much faster and way easier. Using traditional lender financing can often take months to secure and there are often hurdles for both the buyer and the seller.
- Seller financing operates on the seller’s timeline. There are no bank restrictions involved with this type of deal.
- There’s no risk to the seller of lower appraisals. The agreed upon price, is the price is the price. A seller doesn’t run the risk, a lender is going to restrict the buyer’s ability to buy.
- You can more easily sell the property in “as is” condition. You don’t have to jump through a bank’s hoops for financing. You don’t have to commit to a laundry list of property improvement projects to make the property more appealing.
- You can earn a passive and steady stream of monthly income without the headaches of becoming a landlord. You are basically a landlord, without the risks. Without the hassles. You simply cash the checks on this investment.
Take This A Step Further & Make More $ with a Low Interest or No Interest Loan?
This may sound odd to you and not in a seller’s best interest. But listen to this: Taxes on interest are higher than taxes based on principal. The tax on interest may be between 30 and 40 percent depending on your tax bracket. But the tax on principal will remain at a 25 percent depreciation recapture.
In a seller financing deal, the buyer might agree to increase the purchase price (principal) so you can lower your interest payment. And this also lowers your tax obligations, allowing you to pocket a lot more of your money.
If you’re looking to get rid of a property sooner rather than later…If you’re looking for a consistent income from real estate but becoming a landlord doesn’t make sense to you…a seller financing deal might make sense.
Now, I want to close with a bit of a disclaimer. I am not your lawyer or tax accountant, I’m not a taxidermist or a licensed leg waxer. It always makes sense for you to speak with those experts to determine what’s in your best interest.