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Benefits Of Offering Seller Carry Back Financing
- A larger pool of potential buyers
some buyers only look for properties that offer seller financing. They know that bank loans cost about four percent of the loan amount. Other buyers may have difficulty getting a conventional loan. For example, sometimes it’s tough for a self-employed buyer to get a conventional loan even if she has perfect credit.
- A Shorter Time to Close the Sale
Transactions with lenders take longer to close. Most loans require an appraisal and some require an inspection. The appraisal can take weeks to complete. If the inspection reveals defects in the property the lender might require time-consuming repairs even though the buyer isn’t concerned.
- Tax Benefits
Tax consequences depend on individual circumstances, but big taxes often follow a large capital gain. (Capital gain means the property has appreciated in value and the seller is making a profit). The government may take as much as 20 percent of the profit from a sale. Seller financing can help reduce this tax. It spreads the gain over time because taxes are paid as payments are received. Spreading a large gain over time may prevent being bumped into a higher tax bracket or may create time to take some capital losses to offset the capital gain. Also, some extra time might give your seller a chance to reinvest in something that provides tax shelter.
- Good Interest Earnings
Over time, your buyer makes payments of principle and interest to the seller. Seller financing interest rates are usually 1.5 - 2.5 percent over conventional home loans and 4 to 5 percent over money market saving accounts. Instead of putting their cash in a CD or money market fund at five percent, your seller could earn a nine-percent rate on the loan.
- A relatively safe investment
Seller financing with a substantial down payment and a responsible, credit-worthy buyer tends to be a secure investment. Sure, your seller can play the stock market and might earn a higher return, but they would carry a greater risk as well. Seller financing returns a monthly income with a relatively high interest rate, and the investment is protected by real property. If the buyer defaults, the seller forecloses.
But play it safe. Before you’ve closed the deal, encourage the seller to plan on contracting with an established account servicing provider to keep their payment and tax records and handle the monthly transfer of funds. It’s very inexpensive, and they’ll save themselves a lot of hassles.
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