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.

[Gino Barbaro]

@Don Konipol

I can tell you why I've bought and sold seller financed deals, creative deals. Mostly, because the property was difficult to obtain bank financing. There is distress, and the seller, sometimes myself, was motivated, and creative financing worked.

The seller is going to do what's in their best interest. Creative financing worked well in 2009-2015, and it's coming back in a big way. It's a function of the market cycle.

Great post

Gino

[Michelle Boss]

Interesting analysis and topic! I currently have a commercial land development property on the market and am currently offering owner financing. The reason I am offering this is to make a sale easier and close of escrow faster for a potential purchaser. What I would do with the sale proceeds, as pointed out in your post, is reinvest in a first deed private money loan anyway. Why not make an interest return on this property right away, which I already am familiar with and favor, without having to find another property to re-invest the sale proceeds? A few terms that will make this owner financing work for me as the seller: 50% down on the purchase price (it is raw land fully entitled and permit ready to build) and taking the 1st deed position. I can offer an attractive interest rate for my borrower that we are both happy with, and zero points to originate the loan - also beneficial for the buyer. As with all first deed trust loans, my rule is to only invest in a property I wouldn’t mind owning in case of default. Worst case scenario, I own the land again, have paid off my note on it, and made interest income off of it. That is why owner financing is very attractive and favorable in this case for me as the seller.

[Scott Mac]

Let's turn this crystal ball a little bit, and look at OWC from another angle.

Something that hasn't been brought up is the no money down dreamer who is just starting out with empty pockets.

And also the risk that may be associated with not having experience in this business handling a refurbish and bringing a property up to stabilization.

What I'm saying is, a cash cow for some, might be a very sharp tooth alligator for others.

Just my 2 cents.

[Jeff Verreault]

Quote from @Michelle Boss:

Interesting analysis and topic! I currently have a commercial land development property on the market and am currently offering owner financing. The reason I am offering this is to make a sale easier and close of escrow faster for a potential purchaser. What I would do with the sale proceeds, as pointed out in your post, is reinvest in a first deed private money loan anyway. Why not make an interest return on this property right away, which I already am familiar with and favor, without having to find another property to re-invest the sale proceeds? A few terms that will make this owner financing work for me as the seller: 50% down on the purchase price (it is raw land fully entitled and permit ready to build) and taking the 1st deed position. I can offer an attractive interest rate for my borrower that we are both happy with, and zero points to originate the loan - also beneficial for the buyer. As with all first deed trust loans, my rule is to only invest in a property I wouldn’t mind owning in case of default. Worst case scenario, I own the land again, have paid off my note on it, and made interest income off of it. That is why owner financing is very attractive and favorable in this case for me as the seller.

[Jeff Verreault]

Michelle, where is the property located?

[Michelle Boss]

@Jeff Verreault SF Bay Area Wine Country

[Michael Quarles]

substitution of collateral is something which can be highly unethical. I stopped teaching it years ago. Btw  don’t teach anything anymore. 

I think you missed;

1- easiest and fastest way to sell their property 

2- qualified buyers when given the opportunity of buying via seller financing won’t tie up ability.  That ability is beyond credit worthiness. 
3- the ability to receive monthly cash without receiving all of the cash.  My homeless seller needed seller financing.
4- in some cases seller financing is the only option on non conforming use property. 
5- can I say again.  It’s the fastest way to sell and buy a property.  

[Michelle Boss]

Quote from @Jeff Verreault:

Michelle, where is the property located?

I’m new to BP, not sure if I responded correctly in the thread before… The property is in the SF Bay Area Wine Country.

[Don Konipol]

Quote from @Michael Quarles:

substitution of collateral is something which can be highly unethical. I stopped teaching it years ago. Btw  don’t teach anything anymore. 

I think you missed;

1- easiest and fastest way to sell their property 

2- qualified buyers when given the opportunity of buying via seller financing won’t tie up ability.  That ability is beyond credit worthiness. 
3- the ability to receive monthly cash without receiving all of the cash.  My homeless seller needed seller financing.
4- in some cases seller financing is the only option on non conforming use property. 
5- can I say again.  It’s the fastest way to sell and buy a property.  

1 -5 all good points.   

Substitution of collateral isn't unethical if all is disclosed upfront. However, there's a good possibility a homeowner wouldn't understand what he's signing. So here's MY rule in real estate investing, I invest mostly in commercial property, and when I invest in residential it's when the other party is also an investor. If I were to purchase a SFR from a consumer I would INSIST that they employ an attorney.

[Drago Stanimirovic]

Seller financing can certainly benefit the seller, though the reasons are often misunderstood. While some point to tax benefits or the potential for higher interest rates compared to banks, the real motivation is usually the perception that the seller can secure a higher price by offering financing. Sellers believe that by providing flexibility, they can attract buyers who might not qualify for traditional loans and, in turn, command a better price for the property.

This perceived advantage can sometimes lead sellers to agree to terms that heavily favor the buyer, such as zero-interest loans or accepting second-position liens. The focus on achieving a higher sale price can sometimes blind sellers to the risks involved, which savvy buyers may exploit to negotiate highly favorable terms.

From a seller's standpoint, offering financing can be a smart strategy if approached carefully. It allows them to secure a higher price, but it's crucial that they ensure the buyer has a significant financial stake in the deal. Sellers need to be mindful of the time value of money, using realistic interest rates and structuring the deal to protect their position, whether through securing a first-position lien or obtaining a personal guarantee from the buyer.

In the end, seller financing can be a win-win, but it requires a balance. Sellers must be careful not to become so focused on price that they overlook the importance of securing their interests over the long term.

Best,

Drago