Seller financing returns to SF after decade-long hiatus

After a decade-long hiatus, sellers of all types of San Francisco properties are once again offering to stand in for traditional lenders to get deals closed in a down market and receive a steady cash flow, agents told TRD.

In most cases, the idea to offer seller financing came from the owner and not the agent, according to those who represent clients across multifamily, luxury and entry-level sectors. All agreed that the trend has risen after interest rates doubled during the last year.

“You can get your higher price based on where the market was six months ago, because you are offering the mortgage at 4 percent instead of 6 percent,” said Corcoran Global Living multifamily agent Terrence Jones, who last saw the strategy used after the 2008 financial collapse. “The seller gets their price and the cash flow over time.”

Jones is selling 970 Post Street, a lower Nob Hill 1910 apartment building whose long-time owner has no mortgage and is able to finance the transaction for the $8 million property as long as the buyer brings at least $3 million in cash. He said there would likely be more owner-financed transactions on the market now if more sellers were in a similar financial position.

“There’s only a small number that have no debt, but because the rest of the market has dried up, they’re more visible,” he said.

The debt-free portion of the equation is essential because seller financing for only a portion of the loan is much less desirable. It adds hassle and complications to the transaction and traditional banks often will not write loans if there’s a second lender on the property.

Compass agent Andreas Ernst said he received a lot of calls from agents when he dropped the price on his $1.6 million Bernal Heights house listing and added that “attractive seller financing” was available on the flipped property. But those agents became less interested when he explained that the developer-sellers, who put hundreds of thousands of dollars into a gut remodel of the two-bedroom property, could only finance a portion of the loan.

A seller needs a lot more equity in the home to be able to finance the entire loan, he said, explaining that the most likely candidates are those, like the apartment seller, who have owned their properties for 25 or 30 years.

Ernst recently represented the buyer in a deal where the sellers were long-time owners who were able to offer complete financing to his client. He considers the deal a win-win: the sellers had a lower capital gains tax on their long-term investment and now have a monthly income on their former property. The buyers got a lower interest rate plus saved thousands on all the fees they would have had to pay a traditional lender, an important consideration for entry-level buyers. As the agent, he had to “work through the process” with his clients to get their minds around the idea of taking an unorthodox loan, but in the end they decided that there’s “no difference if you pay person ABC or company ABC.”

“If you can save a few hundred a month by sending your check to Mr. Smith instead of Bank of America, I’d rather send it to Mr. Smith,” Ernst said.

Sometimes the appeal of seller financing is less about monthly payments and more about mitigating opportunity costs. Shana Rohde-Lynch sells luxury properties in southern Marin County, including a Belvedere lagoon home that came to market in mid-September asking $12 million. When the waterfront home didn’t sell in a month, she dropped the price to $10 million and her seller offered to finance the deal at 3.9 percent, even though buyers of $10 million real estate likely don’t need to take out a mortgage at all.

“It may be one of those guys that has the ability to pay cash, but may not want to do it right now,” she said, citing this year’s stock market fluctuations.

It’s the first time in 34 years in the business that Rohde-Lynch has offered the option in one of her listings, but she thinks the time could be right.

“With the market slowing, and fewer buyers in that price range in the market, we thought some buyers paying cash might want to keep their cash for a few years,” she said, adding that her client would be offering the loan as a short-term solution while the buyer is “moving their money around.”

Like the other agents, she can’t see the seller financing option ever making up a substantial portion of the market. Even for luxury sellers, she said, “there’s only a small percentage of people who have the ability and don’t need their cash.”

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