When does seller financing make sense for the seller?

[Daniel Murphy]

Hey all, we're looking to sell our home in the Twin Cities Minnesota. We're in a really good area. Looking at listing for the $430-450k range.  We owe about $304k & are in probably year 2 of a 30-year loan at 3.125%. 

Are there any scenarios where offering seller financing, subject to, makes sense for us? 

As in, could we sell off market at a slight premium if we could allow the buyer to take over our financing? And if so, is it possible to get our ~$100-120k equity out in cash through this process? 

[Brett Deas]

Why would you seller finance? What does your lifestyle look like and why would it be advantageous to SF the deal rather than selling it traditionally? 

I would ask those questions first because we don't know anything about your lifestyle or goals. And depending on how you answer those that will probably give you your answer. 

[Osei K Boakye]

To actually consider seller financing approach to sell off your property would mean that you probably own the proper free and clear. This will enable you to become the bank in this transaction by been in the first position or if there still a note on the property, you can do a hybrid of seller financing on the equity you have in the property and subject to on the remaining balance to be paid to whoever financed the property 

For Subject to approach in this situation,  you have to let go of some if not most part of the equity for the investor who will be taking over the note payment.

[Jon Puente]

Hey Daniel, 

Not really, I would just list like normal.  The benefit to do seller financing for buyers is that they can create their own terms.  The only thing that benefits the seller is the purchase price because you can normally get a little more money (selling at a premium), but in return, the buyers are going to want something back aka creative financing.

The terms are normally less money upfront (aka less down payment) and the lowest rate possible.   No one is going to give you 100K as a down payment using seller finance.  For subject to, the buyer would have to end up getting a good deal on the home, enough to be able to make equity.  Subject to deals are normally people who cannot make their mortgage payment or are in a tough life situation.   Also, on subject to, the mortgage stays in your name for at least a year, so that could mess you up down the road. 

Keep it simple. Sell your home like normal and list with a realtor.  Take your money and move to the next home! 

[Benjamin Aaker]

Here's another point: Many buyers who request seller-financing promote that they will be paying the seller a monthly payment for the purchase of the property instead of a lump sum and that this helps decrease taxes. You won't have that benefit because you won't pay capital gains tax on the sale of your primary residence. So, you lose a big benefit of seller financing right there.
How would it make sense for you? If you were looking for monthly income rather than a lump sum. If you wanted to act like a bank and get paid interest on your loan to the buyer. That's nothing to shake a stick at, but there's a big headache if the buyer defaults. That being said, I know investors whose strategy is to buy, rehab, and sell subject-to for the monthly cash flow it brings. If the seller stops paying, they reposes and repeat. It's a business strategy, and probably not something you are interested in doing as a one-off.

[Chris Martin]

The installment sale method generally makes the most sense when disposing of investment property. As others have pointed out, if you sell your primary residence and have lived in it for 2 of the past 5 years, you might be able to exclude from $250,000 to $500,000 in gains. But it sounds like you may not qualify if you have not owned for a full two years. See Publication 523 (2022), Selling Your Home for details.

I have sold investment property using the installment sale method and have purchased using seller financing as well. It may get a little tricky in the new higher rate environment because lenders/servicers may be more likely to call S-2 violations compared to the last 15 years because of the wider rate spread. 

[Bud Gaffney]

@Daniel Murphy if you want to avoid capital gains tax and still have nice cash flow on a nice return (interest rate)

[Bud Gaffney]

@Daniel Murphy no reason for you to seller finance, respectfully. You’d need to pay off the mortgage. How would you do that if you financed the next buyer

[Eliott Elias]

No one is going to put down that much on owner finance. 

[Wale Lawal]

@Daniel Murphy

Seller Financing Advantages For Sellers
Seller financing may prove a good option for those wishing to lend money. Select upsides associated with providing it include:

Ability to save on closing costs
Can produce significant capital gains tax savings over time
Faster time to sale, and ability to sell your property as-is without the need for repairs
Released from property tax, homeowners insurance and various maintenance expenses
Option to sell the promissory note to an investor

All the Best!

[Amber Gonion]

@Daniel Murphy seller financing can be done with a current bank loan in place (conditions are dependent on the individual bank). We are currently working a deal between clients. The bank may require payments and down payment are made directly to the bank to avoid the “due on sale” clause. This is good for the buyer too so that their payment is not pocketed by the seller without making payments.

Seller financing in this market can make a lot of sense. In order for both parties to reach a deal that works for them they are able to adjust the interest rate, down payment amount, and price. It has not been popular in the last 5 years as the market was super hot, but throughout the years before there were plenty of times that seller financing keep deals moving and many people, both buyer and sellers benefited.

The danger is that if the buyer does not take care of the home and depreciates it through abuse and neglect and walks away it is like having a bad tenant with little realistic recourse.

[Daniel Murphy]

Thanks all, it's pretty clear to me that I should just sell my property normally. 

I love learning about all aspects RE & what better way to learn than by asking questions about your own sitaution... 

I just recently learned about the Subto community & have scratched just the surface.  I posed the question just out of sheer curiosity.  

Thanks again!