Its good to be the banker

Seller financing is almost always an attractive proposition to a home buyer.  This is particularly true for investors that are looking to minimize their financing costs while fixing and flipping a property.  The general wisdom is that a seller can maximize their selling price with attractive terms.  Seller financing generally offers the buyer the lowest cost of acquiring a given property.

Why would a seller finance their own property sale?  Many reasons:

  1. Make it easier and faster to sell an otherwise difficult to sell property.
  2. Seller won’t recognize capital gains until each payment is made, minimizing their tax liability
  3. Acting as a bank, the seller essentially creates an annuity, which can provide on-going funds.
  4. Maximize sales price by offering more flexible purchase terms.

If funds are not immediately needed from the sale of your property, this may be a great option for you.  Particularly if the interest you can charge is greater than other returns you can safely make.  Think about it, IF the buyer is unable to make their payments, you can foreclose (just like a bank) and take the property back.  In the meantime, you have gained the benefits of whatever interest and principal payments the buyer has made.

Of course, the risk is that the buyer does not take care of the property and you end up with a house that is worth less than when you financed it.  Just like a bank, you should do your due diligence on the buyer.  Make sure they have a responsible payment history and reasonable credit score.  Generally, people that are responsible have solid credit histories.  I also recommend hiring a competent real estate attorney to draw up the legal documents to protect your interests.

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