There is a perfect storm of opportunity brewing in the current and future real estate market, as interest rates for home mortgages and interest paid on money in the bank, converge to create a win-win for both buyers and sellers.
In a climate where we have seen mortgage interest rates in the last 12 months, rise from 3.85% to 4.55%, many “rate sensitive” buyers have now been priced out the market. At the same time, if you have a savings account, you’d have to search high and low to find anything offering more than 1.5% interest on your money. It’s these two factors which when combined, create the win-win of seller financing.
Seller financing, owner-carry or buying on contract, is when instead of getting traditional financing from a bank or mortgage lender, the seller becomes the bank and grants the buyer a loan against their equity, which is secured by a Deed of Trust naming the seller as the beneficiary. Once this has been done, the transaction closes the same way any standard transaction would close, after the buyer has obtained a loan. Here are some of the ways in which the buyer and seller can both benefit:
- The seller may have a less stringent and time consuming qualifying process
- Buyer can more easily negotiate interest rate and terms of the loan
- Buyer can offer the seller a higher purchase price in exchange for a favorable rate and term
- Avoids potential capital gains considerations for the seller if they sell their home
- Allows the seller to receive a ROE (return on equity) on a monthly basis
- Interest paid on seller’s equity is on average, more than 3 times that received in the bank
- Potentially lessened tax liability for seller, by spreading sale proceed gains over multiple years
- With no lender fees, buyer and seller closing costs will be less
- Buyer can negotiate a lower down payment, leaving available funds to remodel the home
- Monthly mortgage income is ideal for or older or retired homeowner on a tight budget
Typically, the opportunity for seller financing will exist when you have long term homeowners, who have been in their properties for 15-25 years, and now own them free and clear. If they’re hesitant to sell because the property they bought for $150,000 is now worth $1,150,000, and selling would subject them to a substantial capital gains hit, owner financing becomes a logical and viable option to consider.
If you ever have any questions about seller financing or any other aspect of the Westside real estate market, feel free to give us a call, chat with us live, or email us using the Get in Touch form on the right.
Cheers and Happy Home Hunting!