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What are the benefits to seller financing in a real estate deal? We’ll demystify this topic in the following video. My name is Chris at Hauseit. Hauseit is the largest For Sale By Owner and Buyer Agent Commission remit company, established in 2014 in New York.
Well one of the primary benefits to allowing or providing seller financing when you're trying to sell your property is that it may expand the range of possibility of buyers. Especially, if you know in advance that banks will not lend on your property because of various reasons. Perhaps, such as defects in the title city, violations liens or judgments. Keep in mind however, that purchase contracts typically stipulate that the property must be delivered free and clear of title and free of any judgments, liens or violations. As a result, you may have to negotiate with the buyer if you intend to finance the property and get away with it.
So, what's a good example of this? Well, let's say that an owner a few years back put a sauna into his home without getting the proper permits from the NYC Department of Buildings. Therefore, the alteration was done without the proper permits and if found out could result in a violation from the Department of Buildings. This is clearly an issue and may be discovered in a title search or not. However, that’s if they find out about this and presuming that they do may not agree to lend on the property. So therefore, if the owner knows that his or her property is un-financeable but wishes to sell the property as is, anyway perhaps because it's simpler. Well, an option might be to provide owner financing presuming that buyers are okay with this defect.
This greatly extends the range and the possibility of buyers because many buyers will require financing and only a very small subset of buyers will be able to purchase a property all-cash. Providing a seller financing expands the range of buyers in another way as well. Let's say that banks will finance your property so it's not an issue however by providing owner financing you do extend the possibility and range of buyers because there will be some buyers who can't qualify for a conventional mortgage from a traditional lender.
Now, oftentimes this isn't someone that you will want to finance either if banks have turned them down but in rare and specific examples it might actually be a great opportunity for you. For example, what if there is a buyer that makes a very high amount of income let's say he or she is a senior Google software engineer let's say a principal engineer which is one of the top-ranked positions at Google in the engineering division and let's say this buyer makes two million dollars in income per year. However, for whatever reason perhaps because of a high spending or extravagant lifestyle he or she hasn't saved much and has only 10% in a down payment with no post-closing liquidity. As a result, let's say many traditional lenders have turned him down for a mortgage.
Well would you finance this buyer if you could? Well, the answer is obviously yes. Especially, if you don't have another buyer that is as qualified. Keep in mind that sellers can often structure an owner finance mortgage in many ways. It doesn't necessarily have to be a 30-year term like a traditional mortgage. It can be much shorter say 5 or 7 years with a balloon payment at the end structured in a way and with an understanding that this is more of a bridge loan so that the buyer will be able to get by, build up some equity and in a few years take out the owner financing with a traditional mortgage.
Another benefit of owner financing is that the underwriting process as you can imagine is typically much faster than that of an underwriting department at major banks and as a result and under writing and the closing process is significantly faster. One more benefit to consider for sellers is that you will typically be able to negotiate a higher interest rate than a comparable mortgage from a bank due to the irregularity of the product and the illiquidity of it. You typically can expect to negotiate one or two or perhaps even more percent in interest higher than a comparable mortgage. Don't forget that if you need cash down the road there's always the possibility that you can sell the seller financing, essentially, the mortgage to an investor.
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