Can Seller Financing Benefit the SELLER?

[Don Konipol]

Can Seller Financing Benefit the SELLER?

Most “Gurus”, authors, advisors and experienced real estate investors preach obtaining seller “carry back” financing for property buyers in order to (1) obtain financing when they don’t qualify for a 3rd party loan (2) obtain financing when the property doesn’t qualify for financing and or (3) extend the “buying power” of their capital contribution (down payment) to purchase a larger more expensive property by having the seller provide a subordinated mortgage loan.

That’s all and good, but why should the seller agree to finance the purchase of his property, instead of getting CASH for his equity? Well, the reasons given generally fall into two categories - either tax benefits through an “installment” sale or obtaining an interest rate on their capital greater than what banks are paying.

In my 45+ years doing real estate deals, I’ve found maybe once that the tax argument was considered by a seller; further the “greater than bank rate” argument is completely irrelevant because - the proceeds of a property sale were never going into a bank account, at least not most of the proceeds. If they did go into a bank account it was to reestablish a liquify reserve that had been depleted - so interest rate would not be relevant here. Most of the time the seller was either going to pay off high interest debt - like 19% credit cards, or invest in a greater investment opportunity.

So, considering all of this, why do owner financing deals get made?

Bottom line - All hype, bs, misinterpretation, opinion bias, etc aside, sellers willing “owner finance” the sale of their property for one reason - and one reason only: They PERCEIVE that they are getting a higher price for their property by owner financing than by a cash (cash to them) sale.

The “perceive” part is why buyers can sometimes structure terms ridiculously one sided in their favor - because some sellers are so focused on PRICE they become oblivious to anything else.

It’s why I and numerous others have been able to structure 20 year owner financing loans at ZERO interest; why sellers have accepted “substitution of collateral” that gave them a lien on recreational land I had rather than their own income producing property; why sellers accept second position liens and allow buyers to obtain new first mortgages ahead of theirs (subordination), and why sellers always accept mortgages without my personal guarantee.

I myself sell properties and provide owner financing to obtain a higher price. BUT, I am not “blinded” by the sale price. I make sure (1) the borrower has a 10-20% (or more) down payment of his OWN capital invested (2) I understand time value of money and use a realistic and appropriate interest rate to determine the actual value of the note I’m holding and (3) obtain a personal guarantee unless the entity purchasing the property has financial strength in its own right (4) the lien I hold is in 1st position.