Cover Your Assets With Seller Financing

“Can’t Sell the House – Offer Seller Financing To Attract a Whole NEW, Hungry Market”

– Priscilla Marquez

While the phrase “seller financing” may seem frightening to most people, it actually has a lot of potential to raise the value of your home. Due to your control over the qualification requirements, seller financing will primarily boost the value of your home by expanding the pool of potential buyers. Your home gains value as more individuals are able to purchase it (the basic law of supply and demand).

According to the definition of “Equity Solely” financing, the owner only finances their share of the home’s equity. The buyer must have their own financing that is equivalent to (or greater than) the owner’s underlying mortgage in order for this to function. All of the owner’s debts will be settled with the loan proceeds from the buyer’s loan, freeing the owner from further obligation. The owner then lends the buyer the remaining amount of the purchase price.

Why would everyone benefit greatly from this? When compared to other comparable properties on the market, the owner can sell their house faster and for the full asking price (sometime more). The owner can also specify the financing’s conditions to suit their requirements. The buyer can obtain a conventional loan more easily and might even be eligible for lower interest rates (depending on the LTV of the loan). A lender receives a new loan to service, and the mortgage broker gains fresh business. All engaged real estate brokers earn commissions. Everyone is content as the economy continues to run well.

Despite the fact that there is no such thing as “no risk,” the owner in this case faces relatively little danger. The owner will still retain all of their equity and receive interest on it if the buyer makes the agreed-upon payments. However, if the purchaser defaults, the owner is in a strong position to reclaim the property (via foreclosure) and resell it. The first mortgage would cover the costs of the foreclosure, and the original owner is well-positioned to simply repurchase the property. Any money over the first mortgage that is paid to the prior owner in the event that the house is purchased by someone else at the foreclosure auction enables them to recoup their equity.

Let’s use an example where the house is valued $100,000 and the owner has $20,000. The owner could possibly sell the house for $105,000 if he offered seller financing, but we’ll suppose that it sells for $100,000. Then, for a total purchase price of $100,000, the seller would finance $20,000 and the buyer would receive a loan for $80,000. There would be no mortgage insurance because the standard loan amount is just 80%, which lowers the buyer’s mortgage payments (making it an even better deal).

The seller intended to put down $20,000 on the next house, which would cost $200,000, using the proceeds. The seller would have had a loan for $190,000 at 6% interest and a monthly mortgage payment of $1,140 with a 10% down payment. Without the required 10% down payment, the seller is approved for a $200,000 loan at 6.25 percent with a $1,230 monthly payment. In order to make up the gap for the second property payment, the seller offers a $20,000 seller finance note from the sale of the first house at 7% interest only. The seller ultimately benefits by $25/month.

However, what if the seller is successful in selling the house for $110,000 as opposed to $100,000? The purchaser then finances $30,000 while continuing to receive a $80,000 loan. $30,001 at 7% interest-only payments would be $175/mo, which is $85/mo less expensive than a direct sale. Additionally, the seller will receive an extra $10,000 in equity when the buyer sells (or refinances) the property. The seller would receive an extra $15,100 over the course of five years ($10,000 in more equity and $5,100 in additional payments). As a result, the seller benefits by an extra 15% when they sell their house using seller financing.

We must understand and keep in mind that seller financing benefits the seller more than the buyer.

Evelyn Garcia is real estate investor in the State of NJ and NY. She focuses in buying distressed properties, such as fixer-uppers, foreclosures and short sales, and small infill projects.