Owner Financing Outdated?
By Jim Palmer Jr.

The real estate market is currently booming, and sellers who are taking advantage of that flow of money may have forgotten that Owner Financing may be a viable option for them instead of taking cash. For homeowners who need to sell and relocate, this option is likely not the best option because they need the equity to purchase again. But if a seller has property that is not their current residence, assuming the role of lender may be a very lucrative opportunity. For most sellers who wish to sell property that is not their personal residence, the thought of paying tax on capital gains may be a deterrent, especially if they don’t want to roll that investment into another property right away by using a 1031 Tax Deferred Exchange. Instead they can defer that point-of-sale tax hit in another way by selling on contract and paying taxes only on that portion that is a gain to them each year, stalling the inevitable until they are in a lower tax bracket.

Since there are many lenders out there now who will take the risk of lending on raw land and other investment property, sellers are cashing out and putting their money in bank accounts or stocks which are lower yield or much riskier than the interest they could make from a contract with a buyer. Even though bank loan interest is at an all time low (3% range), sellers can often get a much higher yield (5%-7% range) by carrying the contract themselves. Interest never sleeps! The risk of having to foreclose on a delinquent loan is minimal because even if they did incur the cost of foreclosure, they get the collateral back and keep any payments they have received to date.

Many buyers search for owner finance opportunities because they do not have the credit worthiness to obtain a bank loan for a variety of reasons. Usually their perception is that owner financing is easier to obtain and that it takes less cash down payment. That perception is only partially true. Sellers usually want at a very minimum, enough down payment to cover all of their closing costs (average of 9% of the sales price) so they don’t have to subsidize the closing process. Buyers with less than that amount may have to be patient for the market to slow when sellers are more apt to accept a lease purchase, allowing time for a marginal buyer to accumulate enough cash to close.