When Does Seller Financing Make Sense?

seller financing

It’s certainly true that cash can be king.  But there are also instances when seller financing can be a better option for real estate sales.

Seller financing is a good option in a down market, or in a real estate market where home prices keep rising.

Seller Financing Can Make Sense

Seller financing – also known as a seller carryback or a deed of trust note – offers advantages to both buyers and sellers of any type of real estate.

#1 Easy Sale In A Tough Market

In a down real estate market there are more sellers than buyers of real estate.  Offering seller financing can help entice a buyer to purchase your property instead of the competition’s.

#2 Reduce Capital Gains

If the seller owns the real estate free and clear, or has a substantial amount of equity built up, seller financing can help reduce the upfront tax on capital gains.

That’s because rather than getting all of the profit at one time, seller financing allows the seller to spread out the profit over a longer period of time.   The monthly payment received from the borrower will be part principle payment and part interest income to the note holder.

#3 Seller Can Sell The Note

Seasoned deed of trust notes are easy to sell on the secondary market.

Seasoning is a term used in mortgage finance that simply means the debtor or the borrower has made its payments in full and on time.  Usually after 12 months of consistent payments a deed of trust note is considered to be seasoned.

Many times sellers agree to seller finance in order to defer capital gains tax and earn interest income.  But then their situation changes.

Sometimes they want to raise cash for another real estate deal for example.  To do this they simply sell the seasoned deed of trust note to another investor and invest their cash in something else.

A lease purchase of real estate is similar to seller financing and has pros and cons for both the buyer and seller.