Depending on your circumstances, seller financing offers certain advantages. Often overlooked and misunderstood, seller financing can offer the following benefits:
- Monthly Income – Payments from a buyer provide seller with monthly cash flow (income).
- Tax planning – This type of installment sale allows the seller to report only the income received in a single calendar year (consult a tax professional).
- Higher Interest Rate – Seller financing could provide a higher rate of return than a money market account or other low-risk types of investment.
- Higher sale price. There are buyers who have the down payment, income, credit score and/or assets to afford a home but do not qualify for conventional or FHA loans. It is possible that these buyers might be willing to pay a bit more for a property if they are able to secure seller financing.
Because of the recent reforms resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), as of January 10, 2014 those who plan on finance the sale of a residential property containing one to four units may now be considered a “loan originator” which may require compliance with Truth-In-Lending guidelines and disclosures. Although this would apply only to a limited number of people, the Dodd-Frank legislation is serious business so you will want to know what you are doing and what pitfalls to avoid.
David Hamerslough, an attorney for the Silicon Valley of Realtors (SILVAR) recently published an article titled “Seller Financing Under the Dodd-Frank Wall Street Reform and Consumer Protection Act” in which he summarizes and highlights information published by the Consumer Financial Protection Bureau regarding seller financing in the new Dodd-Frank economy. Hamerslough’s article is easy to read and would be valuable for anyone who is thinking about seller financing.
Seller financing is surely not for everyone but, when properly employed, it can provide certain tax and cash flow advantages for the right people. If you or someone you know is interested in learning more about seller financing, contact a real estate professional and/or tax planner to discuss the details of your situation and learn more about the options available.