Generate an Income From Seller Financing
Most people would agree that selling your home is one of the most stressful events in one’s life. It is time consuming, emotional, and a lot of work with repairs and touch-ups. Also, the endless housekeeping to make sure it is presentable for viewing at all times and leaving the property each time a realtor calls. It feels as though your life is literally on hold, just waiting for the big sale so you can walk away and begin a new chapter in your life. It is no wonder most of us just want it over and done with it.
But should you be in such a hurry to walk away? Would you ever consider offering seller financing on your home? Most people would say absolutely not! Property owners typically do not want the risk, they want a clean slate and the money in the bank, but it may be worth considering.
Seller financing can be a powerful tool for the sale of your property, and it is especially profitable if the property is owned free and clear and originally purchased at a fraction of its potential resale value. It provides monthly income without the headache of owning a rental property.
When you are selling your property, there are many variables which will determine how fast your property will sell, the main one being the buyer’s ability to obtain financing. If the seller can provide financing, it opens up a whole new market of buyers. Potential buyers who are unable to secure financing but are willing and able to make the mortgage payments are now your preferred shoppers.
In Mexico, it may not be a case of the buyer having bad credit. Historically, most real estate transactions in Mexico have been settled in cash as it can be difficult for foreigners to obtain mortgages from a Mexican bank. Some foreign buyers are looking for interim financing as they wait for the sale of property back home or until they can liquidate their assets.
Get a Significantly Higher Price for Your Property
By offering to finance your property you can increase the asking price significantly, buyers in this situation are more concerned about the monthly payment and being able to get into the market.
By offering to finance, you also avoid the scrutiny of your property from the bank’s mortgage department, which may sometimes deter potential buyers. Sometimes the mortgage company’s assessment of a property is not as favorable as you would like.
Marketing Your Property
Sellers with experience in this type of sale suggest keeping the ad for your property simple, obviously state that seller financing is available, include the total price and the monthly payment. Once the potential buyer is ready to purchase, you can discuss the terms, down payment, interest rate, and other fees involved in the transaction.
Those that buy and sell property with seller financing should research the laws in their particular state. Some states regulate the maximum amount of interest a seller may charge or the number of properties an individual can finance at one time.
Getting into the Financing Business
For some investors, seller financing has become a business. Making smart investments in multiple properties and offering to finance to the buyers can be a very lucrative business with a steady stream of revenue each month. Many investors have recouped their initial investment from the buyer’s down payment, the rest of the payments are pure profit.
Get the Buyer in by Making it Work
You are in control, you want the sale, but the monthly payments need to be affordable for the buyer. The seller may offer a longer amortization term in order to lower the monthly payments for the buyer, at the same time the seller profits from the extension of the term with interest payments. Or the seller may ask for a more substantial down payment, therefore, lowering the monthly payments. It will be worthwhile if you can find a happy medium and seal the deal.
Unfortunately for the buyer who does not have the means to finance the property, they are at the mercy of the seller which means the seller may charge a much higher interest rate than what the bank or mortgage company is offering. Since the buyer does not have any other choice, they will agree to the terms if you can make the monthly payments comfortable for them. If the property you are selling is paid off and you made a smart investment, to begin with, you are already making money, so if changing the payment arrangements means getting a buyer in you can afford to do so.
Who is Responsible for the Property?
This section will relieve any skepticism you may have about financing a buyer.
Although you receive a monthly payment as you would if you owned a rental, you are no longer responsible for the property. Once the deal is complete, the buyer is essentially the owner making the buyer entirely responsible for any issues and or necessary repairs on the property. It is no longer the seller’s responsibility in the same way the buyer would not expect a loan officer to repair a leaky roof.
It is highly recommended you have a lawyer review the loan agreement.
Profit in Default and Repossession
One of the most significant concerns about financing a buyer is what happens if they default and you need to repossess the property. Although it may be a hassle, it may also be a blessing. You benefit from their down payment and any subsequent payments they made on the property. Back to square one? Yes, but the next buyer will make another down payment, and the revenue will start again with a new buyer. For individuals who have created a business in seller financing they probably originally paid the equivalent to the down payment for the property and have already recovered that cost.
Price, Interest Charges, Service Fees and Closing Fees
- The property is selling for over market price.
- The interest rate is higher than the market rate.
- Financing expenses will be paid for by the buyer.
Monthly Administrative Fees – Whether you are administering the loan yourself or you hire a professional administrator, always charge a monthly fee. Administration duties include:
- Collecting the monthly payment
- Updating the accounting ledger
- Providing statements to the buyer
- Handling delinquent accounts
Closing Fees – Include the lawyer’s closing fees upfront.
Interest Rate – Charge the highest interest rate possible.
A Prepayment Penalty
Include an early payment clause similar to the mortgage companies in the event the buyer pays off the loan early. The penalty may be calculated as either a percentage of the loan balance or as a predetermined number of months interest.
Make sure all expenses, monthly fees, terms, clauses, and interest rate are included in the contract.
Obviously, the potential buyer does not have a perfect credit score if they are willing to pay an inflated price and high interest to get into the real estate market, but it is still essential to check the buyer out. Find out what other debt they have, and why they are in this situation. Understanding someone’s history will help you decide whether or not to finance them. How do you feel about their character? Do they have steady employment, and can they commit to the payments?
Protecting Both Parties Through the Title Deed
Your lawyer or notario will draft a contract as part of the purchase agreement which subjects the property as collateral, and this agreement will be used to prepare the bank trust ( fideicomiso). It will name the buyer as the owner and the seller in first lien position. During closing, the notario will register the property in the Public Registry with the seller financing in place in order to protect both parties.
The Difference Between Rent to Own and Seller Financing
In a rent to own situation the renter has the option to purchase the property sometime in the future, in the meantime, the current owner remains responsible for the property with no guarantee or obligation for either party.
Seller financing is a formal contract and ownership of the property will change hands, the buyer becomes the new owner at closing. The buyer will make their monthly payments to the seller over several years.
The buyer is paying off their loan for the purchase whereas in the rent to own situation the renter is paying towards an investment that may never happen.
Seller financing will benefit you whether you are motivated to sell quickly, looking to use the down payment in order to invest in more properties and build a business providing financing or merely be free of property ownership expenses.