The Three Main Benefits to Owner Financing a Property for a Seller

The Three Main Benefits to Owner Financing a Property for a Seller

Did you know that you do not need to go to a bank and get a loan to buy a property? There is a way where you can purchase a property and the owner can act as the bank. This is called owner financing. It can also be called seller financing, a seller/owner carry back, seller carrying the paper, or an installment sale. Whatever you choose to call it, the way it works is all the same. The buyer and seller determine a price and then terms for a loan. The top three benefits for a seller to sell a property this way include: spreading out the capital gain over a period of years, a passive stream of monthly income without the headache or hassle of management and maintenance, and ease of sale. Here is how the owner can benefit from each.

1. Spread Out the Gain. The first and most important advantage to an owner carry transaction is the fact that the owner will not have to pay capital gains tax on the full amount, rather they can spread their gain out over a period of years. If you have owned a property for a long time your property basis will be very low. Let’s say you bought a rental house for $250,000 thirty years ago, you have fully depreciated the property, and you sell it today for $1,000,000. The capital gains tax you would pay would be on $1,000,000. Depending on your tax bracket, that could be $150,000-300,000 straight to the government in a capital gains tax (please verify these numbers with a CPA for your unique situation, these numbers are for demonstration purposes only). Rather than pay that much to the government on the front end, you could spread out your gain over a period of years by structuring an installment sale where you can earn interest and only pay tax on the principal portion received on the note. In the above example, if you sold for $1,000,000 with $100,000 down you would only pay capital gains tax on the $100,000 (so $30,000 in tax vs $300,000 in tax). You would then have a note for $900,000 that is accruing interest for you. At a 3% interest rate amortized over 30 years you would be earning $3,794.44 per month. Truly passive income!

2. Passive Income. Every landlord knows that toilets and roofs leak, paint chips, water heaters go out, and appliances break. A good manager will budget for capital expenditures to accommodate all of the issues that come up in managing property. After years of management, some people get tired of it. Burnt out. They don’t want to deal with the headache and hassle of calling contractors, handymen, or fixing things themselves. In that case, the prospect of having a passive stream of income secured by the rental property could be very nice. No more monthly bills, landscaping, invoicing, or chasing checks. There will be just one check (or direct bank deposit) that the owner would receive each month from the buyer. This can make it a sweet alternative to continuing to hold onto a property with a lot of deferred maintenance. In the even that the buyer fails to pay the owner the money, the seller can actually foreclose on the buyer, get the property back, and keep their down payment. Some owners have sold their property three times or more and taken their property back each time because the buyer decided to walk away. The way you can structure these deals can be mutually beneficial. You will want to make sure you have a professional look over the contract to ensure that you are being protected on either side.

3. Ease of Sale. The last reason we’d recommend owner financing is for ease of sale. By owner financing a property you do not have to deal with all of the hoops and hurdles that a traditional lender will make you go through. You can truly sell the property as-is in its current condition without needing to make any alterations, improvements, or modifications. You will not need to wait around for an appraisal. This can make it a smooth, easy transaction for all parties. It can help expedite the sale of a property too. There are some types of properties that banks will not touch: certain acreage sizes, zoning types, homes with lots of deferred maintenance, homes in uninhabitable conditions, burned homes, etc. If you are dealing with a tricky property like this owner financing can help you offer a solution to the buyer to purchase your property. As the owner, you will need to do your own homework on the buyer to make sure that they are creditworthy. There aren’t strict lending requirements like there are on conventional loans, so it can be easier to line up a buyer for your property.

For these reasons, we’d strongly recommend you look into owner financing the sale of your next property. If you have ever thought about owner financing a property, it would be worthwhile to connect and chat more. Feel free to share this article with someone who might be considering owner financing a property.