There are alternative avenues to selling your home the traditional way or renting it out like it is commonly done around the country. Owner financing is often an option that most people do not consider but should. Owner financing offers huge, long-term benefits and investment stability as well as future options should you want to get rid of the home.
Benefits of Owner Financing. Owner financing is a common but not always well-known way of selling one’s property. Around 10%-15% of properties that are sold are done so via seller (e.g. owner) financing. First, here is an introduction to Owner financing, so you can see the benefits of being a mortgage note holder.
What is Owner Financing? Owner financing is when an owner/seller puts their property up for sale with themselves acting as the financier of the property, rather than a banking institution. Instead of a bank mortgage, a buyer would pay the seller a mortgage. This has numerous advantages to owners seeking to sell their property and buyers looking for less restrictive options.
Advantages of Owner. Financing for the Property Seller and Property Buyer:• Shorter Time on the MarketStarting at the selling stage, one advantage of owner financing over bank financing is shorter marketing times. Properties marketed as “Owner Will Finance” will draw a greater response and sell approximately 20% quicker than properties requiring conventional bank financing.
Fewer Costs. There are no loan costs to worry about, so a buyer can put the money they save up on mortgage insurance premiums, a down payment, building equity, on origination fees, or underwriting fees, to name a few. Closing costs are also lower or non-existent, as well as quicker, as opposed to conventional selling.
Reduced Restrictions. In addition to fewer costs, there are also reduced restrictions. The restrictive lending requirements of banks and mortgage companies do not apply to owner financed properties.
Installment Sale Tax Deferral. Another advantage is installment sale tax deferral. When a property is sold at a gain and is subject to taxes, there is an opportunity for the owner/seller to delay a portion of payment due when they report under Installment Sale Method (via IRS Form 6252).
Secure Asset. A major advantage to owner financing is having a secure asset. The balance of the purchase price is collateralized by the property itself, rather than a banking institution. If a buyer stops making payments, the seller/owner financier can take back ownership of the home.
Liquid Asset. An advantage that protects an owner/seller’s future interests is the property acting as a liquid asset due to owner financing. This means somebody can purchase the note, the mortgage, trust deed, or contract on the open market, from you.
In essence, this means that the seller that is financing the buyer can decide to sell their future payments (similar to the idea of selling stocks), to a note investor or note buyer. This is an incredible advantage as the seller does not have to commit to the property for life.
Passive Income. By acting as the financer, the seller receives steady income in the form of interest. Buyers find themselves paying the seller 3 to 4 times the amount in mortgage payments due to interest, versus the amount they would pay if they had a banking mortgage. This allows the seller to receive passive income without doing any extra work.
Instead of selling your home and getting the banks and real estate agents involved, and rather than renting your home to tenants, you can become the real estate agent and a bank lender yourself, and make a long-term investment that offers you current incentives such as passive income, stability in the form of a liquid asset, and future choices such as selling your mortgage note at any time and receiving a lump sum of money at any time.
It is also rather risk-free, because if the owners stop paying their mortgage to you, you can reclaim ownership of the home and sell it on the market or sell your mortgage note, whichever pays off better.
Consider your alternatives other than traditional rental properties or home-selling. This can be an incredible investment that is both unique and lucrative.