Benefits of owner financing?

Question

I have heard mixed information on owner financing and hoping for some clarification before I start making the proposal to sellers. Is there actually a tax benefit for the seller. To me it only makes sense if I can get a lower interest rate compared to conventional financing but how would that work for the seller? I have heard of investors on the podcast getting 0% down and 0 interest owner financing. Why would a seller go for that/what is the case to negotiate similar terms? THANK YOU FOR THE FEEDBACK!

Tanner Pile · Answer

Hey Amber! I have been speaking with sellers on owner financing as well. I've noticed it does not make sense for most sellers that are also investors. In my market of Colorado, I will need to have favorable terms of low down payment and low interest. Many want a high down payment and a high interest rate because they are looking at the opportunity cost of leaving a significant amount of money in a deal compared to placing it in another investment. Because of this getting 0-3% interest rate is tricky.

The seller that is in a situation where they want to sell but were unable to get it sold or are huge on finding another investment tend to be more open to it.

As for the tax benefits, instead of the seller receiving a massive profit from the sale and paying taxes on that, seller financing will allow the sale to be spread out over monthly payments reducing the tax burden.

I hope this helps!

Charles Carillo · Answer

@Amber Gazzolo

The main benefit for the buyer is not having to deal with a 3rd party lender and the ability to craft the financing and the deal to fit best for both parties. Sellers with a lot of equity can spread their capital gains over many years while buyers are able to avoid the majority of the closing costs that are typical with 3rd party lenders.

Since the buyer is usually the party that is suggesting seller financing; their goal is to find out what is most important to the seller. Sometimes this is the sale price, ongoing cash flow (interest rate), or the down payment. In the example you mentioned above; if the seller agreed to 0% down and 0% financing; they probably were most concerned with getting the highest price.

Eliott Elias · Answer

The seller is only paying taxes on the down payment and interest payments received monthly.

Marco Bario · Answer

And the portion of capital gains received in a given year above any exclusion (exclusion if applicable - IRS section 121)

And depreciation recapture (if any) to be claimed when filing their next tax return

Wale Lawal · Answer

@Amber Gazzolo

For buyers, owner financing has a number of advantages and disadvantages that should be considered before entering into the arrangement.

Pros for Buyers

• Faster closing: No waiting for the bank loan officer, underwriter, and legal department to process and approve the application.
• Cheaper closing: No bank fees or appraisal costs.
• Flexible down payment: No bank- or government-required minimums.
• Alternative for buyers who can’t get financing: A good option for buyers who are not able to secure a mortgage.

Cons for Buyers

• Higher interest: The interest you pay will likely be higher than you would pay to a bank.
• Need seller approval: Even if a seller is game for owner financing, they might not want to be your lender.
• Due-on-sale clause: If the seller has a mortgage on the property, then their bank or lender can demand immediate payment of the debt in full as soon as the house is sold (to you). That’s because most mortgages have due-on-sale clauses—and if the lender isn’t paid, then the bank can foreclose. To avoid this risk, make sure that the seller owns the house free and clear or that the seller’s lender agrees to owner financing.
• Balloon payments: With many owner-financing arrangements, a large balloon payment becomes due after five or 10 years. If you can’t secure financing by then, you could lose all the money you’ve paid so far—plus the house.

All the best!

Sanat Bhandari · Answer

@Amber Gazzolo As others have said, it defers tax liability for the seller and generates a consistent income stream for them

0% down and 0 interest owner financing, in my experience, only works when the seller is either distressed/highly motivated or really savvy that they can get a high premium (e.g $200,000 for a house worth $150,000 or some ludicrous valuation) for such a financing arrangement

Brett Deas · Answer

Some of the properties that my company buys are not lendable, so the only real way the seller can sell without a cash offer is to offer seller financing. I have never gotten a 0% interest rate but I do know it is possible. Often times it does only make sense if the rate is lower than market but if there is no market for the property than the seller can set it at whatever they want really.

Benefits of owner financing?

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