Seller Financing is Back
By Jim Palmer Jr.

  The last few years in our region has seen a flurry in the real estate market like we had never experienced before. Lenders loosened up the coffers and the money was flowing. What I mean is that borrowed money was cheap and buyers came in flocks. That flurry was at least partly responsible for the shortage of inventory that soon followed that glut.

But now, the Feds are manipulating interest rates to curb inflation and most buyers will now be hard pressed to get a loan in the 7% range. It is possible we could see rates go as high as 10% before they start to go down again. That creates an environment, which is a golden opportunity, for sellers who own their property free and clear and who don’t need that equity for other purchases. 

Before conventional lender rates reached current levels, the money was so easy to get for most buyers that real estate investors could be very mobile. They could quickly liquidate their equity and leverage it into other investments. Now, the market has slowed to almost a standstill (in some segments of the market) and savvy sellers are beginning to realize they can compete with conventional rates and still realize a good cap rate on their investment. 

When sellers “hold the contract”, they are the bank. If the buyer defaults on the loan, the seller can foreclose or even renegotiate a different payment schedule with the borrower. If they received sufficient down payment, the risk of foreclosure is low, but even if they have to foreclose and suffer the cost of attorney fees and loss from damage or cleanup, they still come out ahead because they recover the collateral (the property) and can sell it or use it again. Usually the market value has increased since they inked that initial sales contract and they can sell for more than they did the last time. 

Even though RE investors are used to contract interest rates that are higher than conventional rates, they can now stimulate a sluggish market by offering better rates to borrowers than conventional lenders and make a much better yield than they can get in money market accounts or savings accounts. 

Conventionally minded Investors, including average earners who have invested in 401K accounts, are getting nervous now because they are taking huge hits to their retirement stash. Contract holders don’t worry because they don’t suffer those unpredictable losses and have the security of owning the collateral.