The Art of Seller Financing
By Autumn Allen | January 29, 2024
Introduction
What is seller financing really? When you google the term, you’ll get all sorts of videos and people selling you a course to learn more about it. This knowledge is very powerful, and it should be free to everyone. It’s the art of making payments to a seller instead of a bank, which is financially beneficial for all parties when done with excellent communication and paperwork.
What can it be used for?
I would date to say..what can it not be used for? Look at all it’s applications: the selling of single family homes, duplexes, multi-family apartment buildings, commercial warehouses, businesses, self storage, land, and even boats, cars, pianos, phones, etc. It’s limitless.
To me, it’s the re-distribution of wealth we have been needing. Seller or owner financing has been around a long time. Seller’s were able to be the bank, and buyers can save so much more than using a traditional bank loan. It wasn’t until the banks were formed in 1791 and decided they wanted to control the transaction and be the one to make money from all the interest that the wealth divide started.
So how does this actually work? Let’s take a look!
Let’s Break Down the Numbers
I will be writing this example through the sellers eyes, but I will highlight buyer benefits as well.
Let’s say you want to sell your home, it’s paid off, but the market rates for buying a new home are still quite high. You don’t want to have a mortgage payment after working so hard to pay yours off, just to move and have to pay out of pocket for a home all over again. Let’s call your beautiful home 123 Rainier Rd.
Why Would Anyone Sell Using Owner Financing?
To first understand where we are heading with this, it’s important to remember where we have been. Let’s dive into selling the old-fashioned way.
Traditional Sale
If you listed the home on the market, let’s say you are asking $500,000.
Pros: You walk away from the property with roughly $459,000 after selling expenses and excise selling tax (WA state thing).
Con: What are you going to do with that cash to make sure it’s not taxed another 25-40%, doesn’t lose value, and make you more money?
Con: You sold something that could have brought you cash flow to pay for your next home’s monthly mortgage.
Creative Sale
Let’s say a buyer approached you, offering you more than asking price if you would take payments over time. What does this look like and what are the benefits?
Let’s say the buyer offers you $540,000 to be able to pay you over time plus a down payment. This is also called an installment sale.
For this example, let’s say you both agree to 5% interest, 5% down, and a 20 year note.
As the seller you would:
Make $27,000 up front tax free.
Wake up to $3,386 a month tax free.
Pocket an extra $272,538 over the 20 year period. How the $540,000 turns into $812,538 because of time and interest.
Did I mention this is tax deferred? There are only two ways to defer taxes in our world. Either through doing a 1031 exchange or seller finance.
How does it Help a Buyer?
The savings a home buyer will enjoy with paying you instead of the bank is significant. Even just from a monthly payment perspective, they can either pay the bank $4460 a month at $500,000, or you at $3386 a month at $540,000. Which do you think they would choose?
MINDSET SHIFT
Robert Kiyosaki was taught from a young age that one thing that get’s you out of the rat race quicker is to find a way for someone else to pay for your home or property. This can be done with rents, house hacking, owner finance, extra ADU’s or MIL’s on site, etc. This way your home becomes an ASSET, instead of it being a liability that takes money from you each month.
It may seem too simple, but my eyes are open and these techniques are being used by multi-million dollar apartment owners and in the commericaI space for decades. You can do the same thing no matter the scale.
FAQ:
What if I need a large chunk of cash to buy my next home?
You don’t have to sell your home to get this. There are multiple ways to obtain the cash needed in order to pay down the purchase price of your next home.
Why haven’t I heard anything about this?
There is always resistance to what we don’t understand. It’s our human reaction of fear, trying to protect us. But once you stay open to it, and have the tools to put it in place, it’s unlimited and there is no limit to the real estate you can obtain. If anyone tells you this is not possible, I would highly recommend you reach out to us so we can give you a second opinion. After all, it’s about you and your journey. You definitely deserve to get what you want, and get the best deal in the process!
TL:DR?
Seller finance is a very common way to sell with multi-family, businesses, and commercial, but is considered very foreign to most single family home owners. It is one of the most underrated but beautiful strategies to sell a home in today’s market, making you way more money over time. For sellers, it’s a very attractive way to present your listing, and for buyers they get killer savings!
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About the Author:
Autumn Allen
Hey Pierce County, I’m Autumn Allen! I'm a creative realtor here to challenge the norm of how we are taught about real estate, wealth, and financial freedom. I also like to share handcrafted information about the best restaurants, shopping, activities in and around Pierce County, Washington. Plus, the best hiking, biking, health and wellness options, new hot spots, and more!