Owner Financing is BACK!

Today, we're talking about Seller Financing. AKA Owner Financing.

With the latest slowdown of home sales and increases in interest rates, real estate has shifted and it’s opening doors of opportunity for some sellers and buyers.

How Owner Financing Works

As a buyer or seller, it's worth understanding how owner financing works to determine whether it might be right for you. 

Investopedia describes Seller Financing as "a real estate agreement in which the seller handles the mortgage process instead of a financial institution." Basically, instead of using a bank or mortgage lender, the buyer signs a mortgage with the seller of the property.  And the seller of the property collects the interest on the loan instead of the bank. 

For the last decade or so interest rates were at historic, rock bottom levels. With little to no interest to gain and some risk involved, it didn’t make sense for most sellers to offer owner financing for their property.  

The ROI just wasn’t there.

But with the return of slower home sales and rising interest rates has come the return of owner financing opportunities.

Lets start with the basics.

What kind of buyers might want or need owner financing?

• Buyers with commission income and those who are self employed. Traditional mortgage lenders have a lot of rules to follow and the rules tend to be very conservative with how commission income and self employment income is applied to determine the amount of money a buyer can borrow. A seller can set their own rules and thresholds.
• Relocating buyers. When moving from one state to another, mortgage lenders often have strict rules about proof of employment in the new state, and sometimes a required number of months  on the job before buying which can result in renting first and multiple moves. With seller financing, buyer can move faster and fewer times.   
• Buyers with blemished credit. There are any number of things that can blemish a person’s credit. And sometimes, the blemish is unrelated to housing costs and not a reflection of a person’s ability or commitment to pay their mortgage.  

What kind of sellers might benefit from providing owner financing?

• For starters, any sellers who own their home free and clear and do not need the proceeds from the sale to purchase their next home could be a candidate for seller financing on their home sale.
• Sellers whose investment plans for the proceeds is lower than the 7, 8, or 9+ percent interest they could garner by holding the mortgage.
• Sellers for whom the transaction will result a large tax obligation, like capital gains.  Holding the note allows the seller to spread out that tax obligation.
• Sellers who are within a few years of a job change or retirement that will result in a lower income and tax bracket. In an owner finance situation, the seller will only be paying tax on the amount collected each year during the buyer’s repayment, which is much smaller than the full amount of the home sale. And by setting a balloon payment for a few years later, when the seller is retired and their income is reduced they will pay the tax based on that reduce income tax bracket. It could mean a huge tax savings to the seller compared to what they would pay if they sold NOW a cash buyer or 3^rd party financed deal.

Bottom Line

If you're in the market to buy or sell a home, you should take a moment to get acquainted with the concept of owner financing. As a seller, owner finance could be a great way to earn interest on your investment for the short, mid, or long term. Holding the note for someine might reap you some tax savings. For buyers, it could save the costs and hassles of an extra move. It could help you buy your dream home sooner, or maybe help you to become a homeowner at all if traditional banks aren't able to assist.