You may have heard the term “Seller Financing” or “Owner Financing” being thrown around in real estate conversations. But do you know what it means? It can be a great tool for putting more money in your pocket from selling your house, but how does seller financing work?
Seller financing is actually a broadly defined term that is used in a number of different types of real estate transactions. But in essence, it is a way to sell your house when you don’t need all the cash at the time of closing. It lets you delay part of your payout, usually in return for some other form of compensation.
How Does Seller Financing Work
Let’s look at a couple examples:
The Fat Cat
Ok I named this example the “fat cat” because a fat cat actually just walked by my window as I was writing. Go with the flow, right? Let’s say you’re selling your house in Honolulu, a house worth about $600,000. Now let’s also assume you own it free and clear, meaning you have no mortgage.
The question to ask yourself is: Do you need all the money from the sale at the time of closing? If not, then figure out how much you do need. Assume you’re looking to downgrade to a smaller property and need $350,000 for that other transaction and want a cushion of another $50,000. That leaves $200,000 (minus closing costs).
If you don’t need the $200,000 upfront, why not seller finance it to your buyer? You might be able to negotiate a 5% interest rate on those funds — much better than you’d get in a checking account these days! If your buyer held the note for 6 months to either renovate and sell the property or to get their own mortgage in order and finance out, then you’d earn an additional $5,000! ($200,000 @ 5% for half a year)
See how that works? Of course, your $200,000 would be protected by a lien against the property recorded by the title and escrow company at the time of closing. There will also be a promissory note that accurately describes the full terms of your interest rate and timeline.
The Not-So-Fat Cat
Here we have someone who still has a mortgage on their Hawaii home. Consider a single family house in Kailua. The owners are selling for $750,000 but still owe $200,000 to the bank. They need $300,000 at closing to pay off some credit card debt and student loans for their children and have some breathing room money for the next few months. This leaves them with $250,000 that they decided they don’t need right now and would like to put to use at a respectable interest rate. At 6% for 6 months, they would earn an additional $7500.
We’ve often used seller financing to buy houses from sellers in Hawaii. Sometimes we pay off the mortgage, provide the necessary funds to the buyer at closing and allow them to seller finance a balance. If there’s no mortgage, then just like the above example, we make sure they have the funds they need for the foreseeable future while we renovate and resell the house, and let them seller finance the rest at a nice interest rate. Of course, if they just want to sell their house in Hawaii for cash completely, we can do that as well!
If you’re selling your house in Hawaii and are interested in seller financing, then we’d love to hear from you! (actually, we’d like to hear from you even if you’re not 🙂 ) As usual, we’ll make you a cash offer – just ask us!