UTAH REAL ESTATE INVESTOR

How would you like to know a way to sell your home using seller financing but have no risk in the transaction. This can be accomplished through “equity only” financing. This means that the owner can sell their home and only seller finance their “equity” in the property.

While “seller financing” may sound like a scary term to most people it is actually a very powerful tool for increasing the value of your property. The main reason that seller financing will add value to your property is that you increase the number of people who can qualify to purchase your property because you control the qualification standards. The more people who can buy your home the more valuable it becomes (the basic law of supply and demand).

“Equity Only” financing is exactly what it says, the owner only finances the equity they have in the home. The way this works is the buyer is required to secure their own financing equal to (or greater) than the owner’s underlying mortgage. The loan proceeds from the buyer’s loan will pay off all indebtedness of the owner and remove the owner from future liability. The balance of the purchase price is then financed by the owner to the buyer.

Why would this be a great deal for everyone? The owner is able to sell a home more quickly than other comparable homes on the market and for full market value (sometime more). The owner is also able to dictate the terms of the financing to meet their needs. The buyer has an easier time to qualify for their conventional loan and may even qualify for better rates (depending on the LTV of the loan). The mortgage broker gets new business and a lender gets a new loan to service. Any real estate agents involved with generate commissions. The wheels of the economy turn and everyone is happy.

While there is no such thing as “no risk”, the owner in this situation has very little risk. If the buyer pays as agreed then the owner collects interest on their equity and will still preserve all of their equity too. However, should the buyer fail to pay, the owner is in a powerful position to take the house back (through foreclosure) and then sell it again. The foreclosure costs would be paid by the 1st mortgage and the original owner is in a strong position to simply buy back the property. And should the home be bought by someone else at the foreclosure auction, any dollar amount over the 1st mortgage is paid to the previous owner, thereby allowing them to collect their equity at the foreclosure auction.

Example:
Let’s assume the home is worth $100,000 and the owner has 20% equity ($20,000). By offering seller financing the owner could probably sell the home for $105,000 but we’ll assume that it is sold for $100,000. The buyer would then get a loan for $80,000 and the seller would finance $20,000 (for a $100,000 purchase price). Because the conventional loan amount is only 80% there would be no mortgage insurance which reduces the mortgage costs to the buyer (making it an even better deal).

The seller was going to use the $20,000 as a down payment to buy the next house for $200,000. With 10% down payment the seller would have had a loan for $190,000 at 6% interest with a mortgage payment of $1,140/mo. Without the 10% down payment the seller gets a loan for $200,000 at 6.25% for a payment of $1,230/mo. So the seller offers the $20,000 seller finance note of the sale of the first house at 7% interest only which gives $115/mo payments to off-set the difference for the second house payment. In the end, the seller is better off by $25/mo.

But what if the seller is able to sell the home for $110,000 instead of $100,000? Then the buyer still gets a loan for $80,000 and finances $30,000. $30,000 at 7% interest only payments is $175/mo which is $85/mo better than an outright sale. And when the buyer sells (or refinances) the property the seller will net an additional $10,000 of equity. Over 5 years this would equal an additional $15,100 for the seller ($10,000 additional equity and $5,100 additional payments). So the seller makes an additional 15% on the sale of their home using this form of seller financing.

What we must learn and remember is that seller financing is better for the seller than it is for the buyer.

One of the most misunderstood topics in real estate is “Seller Financing”. This is probably because the topic of seller financing is usually discussed from the perspective of the buyer. And in most cases the buyer is a beginning investor who is trying to get a “good deal” or they are starting to buy property with “no money down”. But all too frequently the deal falls apart and the stories explode about the problems of seller financing.

It is time to unfold the power of seller financing and the simple secrets and techniques to keeping the transaction a positive experience for everyone. While most people can explain the benefits of seller financing for a buyer what most people don’t understand is that seller financing is actually better for the seller than it is for the buyer. Here are several ways that the seller can benefit from offering seller financing on their property:

1. Timing – The seller has complete control over the timing of the sale when they are offering the financing. The seller can determine just how long it will be before the sale closes. The seller can determine how long they can stay in the house after the sale closes. The seller can determine exactly how long the buyer must pay on the mortgage and when they have to refinance and pay off the loan. And by offering seller financing they can get their home sold more quickly because of the appeal of seller financing to the market in general.

2. Higher Sales Price – Market value is based upon “supply and demand.” Most sellers are not offering seller financing so there is a limited supply but there is a huge demand. As a result, the price of the home in higher than the other comparable homes in the neighborhood. Also, because the traditional costs of mortgages are no longer in the equation you can collect that money too (as much as 3-5% of the value of the home) as part of the sales price.

3. Cash at Closing – There is nothing that says a seller must finance the entire purchase price of the property. The seller can require a down payment which will provide some cash at closing. (There are more advanced way to collect cash at closing which go way beyond a down payment but can still result in a “zero-down” for the buyer.)

4. Payments over Time – When the seller finances the equity in their property, those payments become a steady stream of income for the seller. This becomes a fantastic income stream for someone who may be down-sizing or who does not want their property for any reason (this is especially great on investment properties).

5. High Return on Investment – Considering the equity as an investment, the payments received from seller financing are better than one can expect from a savings account, CD or mutual fund. Even if the interest rate on the seller finance mortgage is small, the principle balance of the investment is larger than the seller could have received through a traditional sale.

6. Difficult Properties Sell Easily – Sellers who have properties that are difficult to sell can sell them with seller financing. Again, the demand for any property increases as more people are qualified to buy them.

7. Collateralization – The seller controls the terms of the mortgage and can require additional collateral to secure the loan. This additional collateral can come in many ways. Of course the seller can require a large down payment. However, some other options include additional co-signers on the loan or equity in a 2nd property. If the buyer owns another home or an investor own additional property, the seller can attach their seller finance note to the other property. This will make it more painful for the buyer to default because the seller can claim the additional property in the event of a foreclosure.

In selling a property it is the owner who has control over the entire transaction when they offer seller financing. The seller controls all the aspects of the sell including the timing, the price, the terms, their return on investment, and security and protection of their equity. Since the seller has the flexibility to craft a sell the meet all of their needs, why would you sell it any other way?

How would you like to offer seller financing but remove all personal liability for the property after the sale? How would you like to increase your income from your rental property and get rid of ALL property management? How would you like to get paid twice what your property is worth? How would you like to sell your investment property and never pay capital gains taxes? Stay tuned for some practical examples of seller financing tips and techniques that will keep you out of trouble when you sell your property.

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