When Does Selling Your Home Directly to the Buyer Make Sense?
There’s no doubt that sometimes, unforeseeable events can suddenly occur, making homeownership difficult, but there are options. Seller financing offers more flexibility, passive income, and outstanding tax benefits for sellers. This article looks at how some life events can trigger an owner to sell their home, the benefits to sellers of using seller financing, and how HonestDeed can help.
What Is Seller Financing?
When buying a home, most people will go to the bank, apply for a mortgage, purchase a home, and continue to make payments for many years to pay back that loan. With seller financing, the seller acts as the bank to the buyer, and the buyer is responsible for paying installments plus interest to the owner.
What Life Events Can Trigger an Owner to Sell Their Home?
For some homeowners, seller financing can seem like an unusual option. There are definitely benefits, especially for those unforeseeable life events. Below is a list of different situations where seller financing can be an excellent option:
Seller financing has a secret benefit for sellers with retirement around the corner: passive income. Without even having to lift a finger, sellers can make money easily, while the buyer is responsible for paying off the loan with interest. To buyers, this is a pretty sweet deal: no rigid application process and regular monthly payments plus interest.
Imagine this: a buyer agrees to make monthly payments of $1,091 to the seller for just under five years. (This doesn’t include property taxes or homeowner insurance — those are separate payments). By the end of 5 years, when all is said and done, the property owner will have $65,460 in payments.
The decision to downsize your home can be a great way to free up cash that might be locked up through home equity and lower costs by moving into a smaller place. Seller financing can help by giving sellers a new income stream in their investment property. Sellers can use the regular installments to pay off the rest of their mortgage, any other debts, or live off it. The options are endless.
Let’s take Dave as an example. Dave bought his home 30 years ago with no mortgage left on the property. He’s looking to retire next year and would like to downsize and free up some of his equity to live off. A buyer named Shaun comes along and proposes seller financing, an option that Dave hadn’t given much thought to before.
Shaun offers to buy the home for $250,000, with a down payment of $25,000 in cash. The remaining $200,000 has a 7% interest rate for a 20-year term. Now Dave’s over the moon, with Shaun’s monthly payments of $1,744.43 covering his expenses. Dave can now downsize into a new place, have peace of mind, and ride off into the sunset (if he likes).
A Need for Cashflow
Typically, once the sale of a home is complete, the seller receives a one-time lump sum payment and nothing more. But, there’s another way. Seller financing offers sellers the chance to have some consistent cash flow for years to come. The buyer is responsible for paying the mortgage, plus with higher interest rates, sellers will have more than enough money to use elsewhere.
Here’s an example to illustrate this point: A buyer is looking to purchase a historic home that doesn’t qualify for a traditional mortgage from the bank. The buyer works out a deal with the seller, paying $80,000 for the property with a $25,000 down payment — 31% over the asking price.
With $638 monthly installments, the buyer covers the property taxes and home insurance payments. The buyer finances the remaining $45,000 with an interest rate of 7% for a five-year term, amortized for 20 years.
Inheritance is another life event where seller financing has some definite pros. In this case, seller financing helps the seller get some passive income and lowers their capital gains tax. (When you inherit property and sell it, you typically owe taxes on any gains the asset property made since you inherited it.)
Let’s crunch the numbers and see how this looks.
Let’s say a home sells for $200,000, and the buyer pays 20% cash down ($40,000) with a balance of $160,000. On top of that, let’s say the interest rate is set at 8%, resulting in monthly payments of $1,066.66. It’s a smart financial option for any sellers out there.
Life happens, and unexpected expenses come, which can add up quickly. As a form of cash flow, seller financing is an excellent solution for unforeseen medical events. By selling their property, sellers can pay for monthly medical expenses, such as long-term residential care plus have peace of mind.
In the case of divorce, which isn’t ever cheap, seller financing is an ideal way to have one party buy out the other over several years. What happens here is the spouse that’s buying the property will pay the selling spouse regular monthly payments until their portion is complete.
A simple example would look like this: The divorcing parties have a mortgage loan with a principal balance of $150,000 and total equity of $150,000 in the property. The purchasing spouse will pay $150,000 to pay off the original loan and $75,000 for half of the home equity. To cover the selling spouse’s buy-out and equity, the buying spouse will pay $225,000.
Why You Should Consider Seller Financing
When it comes to seller financing, for many buyers who don’t qualify for a mortgage, the decision is simple. It’s a great alternative to breaking into the housing market. Below are three key benefits that every buyer should mention to sellers when approaching the topic of seller financing:
Usually, when it comes to selling a home, the seller will have to pay a high rate of tax on the lump sum they receive for sale. The benefit of seller financing is that the tax rate can be much lower; the owner can realize the capital gains over several years with the monthly payments. In the end, the seller keeps more money for themselves and pays less tax to the government.
Paid Interest Income
The interest rate for seller financing tends to be higher than what the bank’s charge, which is a big plus for the seller. The reason is that the seller is taking a risk by accepting many payments over time rather than a lump sum; to lower this risk, sellers usually increase the interest rate.
As a buyer, it’s good to be aware of this point, and when approaching a seller, go in with some examples to give them an idea. For example, a buyer might offer to pay the total list price with 20% down and finance the remaining with 6% interest over 20 years.
Negotiate On Your Terms
Buyers and sellers can negotiate on their terms. With only two parties involved and no banks, there’s plenty of flexibility when finalizing everything. There’s more opportunity to discuss interest rates, payment schedules, and other conditions without anyone else to answer to — no banks or underwriters.
Why HonestDeed Can Work for You
The traditional route to selling or buying a property doesn’t always work for everyone. HonestDeed has been working on simplifying this financing process, focusing on helping buyers and sellers. Learn more today!