What are the pros and cons of owner financed real estate for buyers and sellers?
Seller Financing 101
Owner financing has been a staple in the real estate world for years. In general it comes in and out of fashion depending on various factors in the market such as interest rates, ease of access to mortgage credit, and how robust the market is, as well as what other alternative investments are available.
There are several arrangements that are often lumped in under the category of ‘seller financing’. In its purest sense in this arena it typically takes the form of an owner ‘taking back’ or giving a private mortgage loan to the new buyer. The note and mortgage should be recorded in public records at the time the title to the property is transferred. Terms typically mirror conventional mortgage loans when it comes to interest and monthly payments. However, private financing often comes with a shorter balloon period. That means the loan will need to be paid off or refinanced when it matures. This could be in a couple of years, 10 years out, or longer. Generally it will provide enough time to improve and season the enhanced performance of the property.
Seller Financing for Mobile Home Park Owners
Why would a mobile home park owner offer seller financing?
There are a number of reasons for sellers to consider offering financing including:
Minimizing Tax Liability
One of the reasons that many current park owners have held onto their holdings for so long is to delay any tax implications until they are in a much lower tax bracket. There are other tools for deferring and eliminating taxes on gains such as 1031 exchanges and self-directed IRAs, but not all are aware of them. By offering financing and creating a new note sellers break up their receipt of the proceeds, and may pay less tax.
Superior Returns & Security
What else are you going to do with the cash? Gaining a large lump sum of cash now may sound great, but that can create other challenges. How do you protect that capital? How do you earn a decent return on it? Banks haven’t proven reliable, and they certainly aren’t paying any interest. The stock market offers little protection, and if you already have some money in the market you need diversification. Holding a mortgage means solid, predictable returns and cash flow, with the security of a piece of tangible property that you already know very well.
All the Pros without the Cons
You can still all the benefits of your mobile home park investment, without having to worry about management or maintenance.
Get a Premium Price
If others aren’t offering financing, this can be a great way to stand out, and potentially negotiating a higher sales price. That’s on top of extending the returns with ongoing interest.
Note that the Dodd Frank Act has restricted the ability for many to offer seller financing on the sale of residential properties for owner occupants. This shouldn’t impact sellers of mobile home parks for investment purposes according to Florida law firm Barnes Walker. However, many real estate investors are terrified of making a mistake, and have pulled back on this strategy without knowing what the act really applies to. That means a great advantage for those that do know the difference and use it.
Seller Financing for Mobile Home Park Buyers
Owner financing may not always appear to be the cheapest deal, but it can also come with some sweet perks not everyone considers.
Reduced Acquisition Costs & Profits
Going to a mortgage lender or commercial bank costs money. It can cost a lot of money beyond the interest. Some loan brokers will even ask for upfront fees. None of these costs applies to obtaining seller financing. That can make thousands of dollars difference, and maybe even more when acquiring real estate. That keeps holding costs down, yields up, and goes right to the bottom line when it comes time to resell.
Avoiding Hassles of Bank Financing
Fees aren’t the biggest pain of going to the bank. Mortgage lenders are still very picky. Sometimes their data driven approach to underwriting can result in many conditions and demands that seem to make little common sense to borrowers. It can sometimes feel like being paper-worked to death. The rewards are still well worth it if you don’t have other financing options, but seller financing cuts out the stress, speeds up acquisitions, and makes the investing process far more enjoyable.
Keep Credit Free
Mortgages that show up on your credit report can cause temporary dips in your scores, and eventually limit the credit others will extended to you. Seller financing generally won’t show up on your credit, even if you sign a personal guarantee.
Alternative Funding Options
It’s always worth asking about seller financing, even if it isn’t being advertised. If it isn’t available, and using commercial mortgage financing isn’t attractive, there are other options to explore.