Seller Financing Benefits Real Estate Investors
Call it a "credit crisis" or a "credit crunch." Either way, a shortage of ready cash in U.S. financial markets has made financing real property investments much more challenging now than it was in recent years.
Fortunately, seller financing can be a very good alternative for investors who want to buy or sell residential rental property today. Unlike a conventional loan, seller financing is structured as a stream of payments from the buyer to the seller over time, rather than an immediate lump sum payment when the deal closes.
For buyers, the chief advantage of seller financing is the ability to purchase a property without a conventional loan from an institutional lender. Seller financing also may entail lower costs, easier qualifications and less paperwork than a conventional loan.
For sellers, the prime advantage is the ability to attract potential buyers who otherwise might not be able to purchase the property. An attractive interest rate on the loan is also an important benefit.
Seller financing is most effective when the seller owns the property free and clear, and is more interested in cash flow than a large sum of capital. Investors, longtime homeowners and heirs to unencumbered properties tend to be among the more likely candidates to offer this type of financing.
Acting as a lender always involves some degree risk. These pointers can help to minimize the risks and protect the buyer's and seller's interests:
- The seller should conduct a thorough assessment of the buyer's financial position and creditworthiness. A recent credit report and credit score along with bank statements and other financial documents should be reviewed.
- The loan should be secured by the property, so the seller will be able to foreclose if the buyer defaults.
- The property should be adequately insured.
- A sizable downpayment can reduce the risk that the buyer may default.
- The interest rate on seller financing is usually higher than the market rate for a conventional loan to compensate the seller for the additional risk.
A title or escrow company should be involved in the sale of the property, and a loan servicing company may be desirable to handle the paperwork and process the buyer's payments.
An accountant and attorney should be consulted for advice about how to structure seller financing and information about the legal and income tax requirements. A seller-financed transaction typically can be treated as an installment sale for income tax purposes, which may offer some tax benefits for the seller. Refer to IRS Publication 537 "Installment Sales" for more information.
Copyright 2008, HomeVestors of America, Inc. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.
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