While listing a property recently, I asked the seller what they would be doing with the money, since he owned the property free and clear, and had no mortgage to pay off. He wrinkled his nose as if the question made him uncomfortable and bluntly asked why that was any of my business. I explained to him that if he was just going to put the money in the bank and draw a low percentage of interest instead of investing his proceeds in a new property, it might be a prudent strategy to offer seller financing. That way he would be the bank and would in essence be lending the money to the new buyer and could earn a much higher percentage of interest.
One reason I was asking this question was to know whether to offer that option in the listing or limit the options to bank financing or cash. The other reason was to give the seller the heads up that this option should be explored in terms of his financial portfolio. In the beginning of that conversation, the seller nervously expressed concerns about the hassle of tracking payments or having to foreclose on the property. Once they understood the risk was minimal compared to the benefit, the enlightened seller confidently decided they would be willing to be the bank and collect the interest so long as the down payment covered all of their closing costs and left them with pocket money at the closing table.
In the past, seller financing has been a very common practice, especially in rural areas where some properties such as raw land or single wide mobiles homes were hard to finance through conventional sources, but it seems as though that practice has become a forgotten financial strategy in some segments of our society. Albert Einstein famously stated, “…interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.”
One of the only negative aspects of seller financing is that your asset is not liquid. What if one of the spouses develops a devastating medical condition and needs the cash? One solution to that dilemma is to sell the contract. There are many investors who buy such contracts, though usually at a discount. Nonetheless, this option can cure the liquidity problem in a short amount of time, and in most cases the seller has already made enough interest on the contract to absorb some of the losses in the discount.