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Uncover the Power of Seller Financing

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Seller Financing: a Little-Known Strategy

Leave your seller finance questions in the comments area below…

by guest writer Julie Broad

During the heated market conditions of the mid-2000′s, sellers willing to finance real estate deals were really tough to find. Homes were selling fast and for so much more money than most sellers expected.

Today, with cooler housing conditions, lower prices than some sellers want to accept, and terribly low rates on “parked” cash, we’re finding more sellers willing to entertain the option of financing some of the property to increase their return, speed up the sale and get a good price for their property.

What Is Seller Financing?

Seller financing, more commonly called seller carryback financing, is simply where the seller of a property is willing to provide some (or all) of the mortgage financing on that property.

Seller financing can take several different forms. We’ve done deals where the seller provided the entire mortgage, which amounted to 80% of the property value. We paid her 6% interest amortized over 25 years for a 3 year term with no prepayment penalties and an option to renew. She was able to sell her house in a slower market and made more money from it than she otherwise would have through three years of interest payments.

We also have used seller financing to top up traditional bank financing. In other words, we’ve had sellers provide us with a second mortgage (which simply means they are in second position behind the bank) to minimize the money we had to put into a deal. We’ve also used it to bring the financing on a property up to 80% of the loan to value when a bank would only loan 65%.

We’ve also used seller financing in the form of a promissory note. This is definitely riskier for a seller because a promissory note is not registered on title, but as an investor it’s a little easier to work with because secondary financing on a property can upset the bank that sits in first position (banks like you to have plenty of equity in the property and won’t fund your deal if you’ll be too highly leveraged with the additional financing).

A promissory note is simply a loan from the seller of the property with a contract stating that you (the buyer) promise to pay a specified amount of money to them (the seller) at a specified time in the future. It is not secured by the property but it is a binding contract whereby you agree to pay a certain amount to the seller. When we’ve used this form of seller financing in the past we typically make one balloon payment to the seller at a time in the future, but you can structure them like a mortgage with principal and interest payments, interest only payments, or annual blended payments.

Benefits of Seller Financing for the Seller

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Click here to download "How to Invest in Trust Deeds" guide

Why would a seller even entertain providing financing? There are several reasons:

  • faster sale of a property in a slower market
  • a higher sale price because most investors are willing to pay a premium for a property they don’t have to finance using bank financing
  • a higher overall return for the seller because even if the buyer doesn’t pay a higher price, there is a usually a good interest rate offered on the deal which essentially equates to a higher overall sale price. For example if the home would have sold for $300,000 but there is a two year 80% loan to value note at 6% interest, the seller is essentially getting $328,800 for the property ($240,000 mortgage times 6% interest times 2 years).

There are also potential tax savings if the home was not the primary residence of the seller whereby they can defer some of their capital gains to future years which can help to reduce the income tax bracket the gain ends up being charged in. (of course, sellers should speak to their accountant to understand if this benefit applies to them and their situation).

The biggest benefit for a seller is gaining a higher return on the proceeds of the sale of the property than if the funds sat in the bank.

Why earn 2% in a “high interest savings account” at your bank when you can earn 6%, 7% or more on a note you create? It’s a property the seller is familiar with, and the worst case scenario is that the buyer defaults on the payment and the seller gets the house back to resell again.

What kind of security does a seller have who puts their sale proceeds into mutual funds or stocks? None.

Seller carryback notes aren’t the solution for every seller, but many folks are looking for ways to reduce their tax bill and still dispose of a property. Others want to bring in secured income every month. For some other sellers, it is just a way to sell an otherwise tough to unload property. Seller financing provide an excellent solution for these types of sellers.

How to Find Seller Financing Opportunities

There is only one way we’ve ever found sellers willing to carry financing … and that is to ASK!

Yes, it is occasionally mentioned in a listing and once in awhile an agent will mention it to us, but in all the cases where we’ve actually done a deal that used seller financing, it’s been because we asked.

There is no sure way to know seller financing is going to be an option until you ask, but some positive signs that one is a possibility include:

  • A mention in the MLS listing that there are no financial encumbrances on the property
  • A mention in the MLS listing that the seller is willing to carry financing
  • Any indicators that it’s a rental property and that the property has been owned by the current investors for over 10 years
  • Private sales where there is an indication that the sellers are willing to be creative with the deal
  • Retirees downsizing into smaller condos or smaller homes who have paid off their home and don’t need their cash in a lump sum
  • Quick price drops on a MLS listing. This can often indicate a strong motivation to sell. Why not offer a good price for the property in exchange for them carrying some or all of the financing?

In general, we find that the easiest place to find people willing to do seller financing is your local real estate investing club. Fellow real estate investors typically understand seller financing more than average home sellers and unless they have immediate plans for the cash many investors are happy to get a secured return on their money for awhile. Plus there are the tax benefits of being able to defer some of the capital gains on the property for a few years. There are many sellers who benefit from this arrangement so all you need to do is simply ask!

Julie Broad is a full time real estate investor in Canada helping make investing simpler for other investors. Get her free Real Estate Investing Starter Tips Guide and more useful resources at http://www.revnyou.com.

Leave your seller finance questions in the comments area below…

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  • Sybursu

    Can this work for buying out a sibling with an inheritance property? If so, how would one structure it? Say a house worth 500K with the sibling buyout being 250K. Thanks.

  • Yasin

    Thank you for good tips on seller financing,
    What if seller has existing mortgage on the property and does not have much equity in the property,
    For example; House market value $ 120 K mortgage on the property is $ 106 K, Seller wants only $ 2,000
    to move out and will give the keys, How you will put the deal together.

    Thank you,

    Yasin

  • bill

    how are you handling sales now that the SAFE ACT is in force as of 10-1-10

  • http://www.isound.com/jvm Jay von Mohr

    Yasin,

    You could take the deed (sub to), pay them the 2k. Then you “own” the 12k difference
    of equity.

    You could then sell on a lease option for a higher sales price. Get a slightly higher rent
    amount (for cash flow), plus the non-refundable option money they put down up front.

    You could also sell it on an owner financed wrap & ride the difference.

    Just make sure the terms of the loan are good before taking sub-to.

    Sybursu,

    I take it the home is free & clear? If so, you could take out a loan at a very
    low interest rate & pay them off in one chunk (if that’s what they need).

    Or you could make payments to them over time at an agreed upon rate.

    If you didn’t want to keep the house, you could sell it on a lease option
    & split the proceeds with your sibling till the buyer exercises the option.
    If they don’t buy, just repeat with a new buyer or sell outright if the
    market has rebounded.

    You could also do a seller financed sale (note) & split the proceeds (if
    you both want money over time).

    Hope that helps,

    Jay von Mohr
    Lancaster, CA

  • http://twitter.com/RevNYou Julie Broad

    Hi Yasin,
    If the seller doesn’t have much equity then seller financing doesn’t work. The options I personally would then consider are an Agreement for Sale or a lease option on the property. In both cases that only works if your mortgage payment is low enough relative to the rent you can get for the property.
    Cheers,
    Julie

  • http://twitter.com/RevNYou Julie Broad

    Me personally? I’m in Canada.

  • http://twitter.com/RevNYou Julie Broad

    You can structure it however you can agree to structure it. What I mean is that it will depend on how much money your sibling needs out of the property to begin with and how much they are willing to carry in terms of financing and at what rates. All of that is negotiable between the two of you. What you will want to do is speak with an accountant and maybe a lawyer to sort out transfer of title issues and taxes so it’s structured the best for everyone. I am not an expert in those areas and always happily pay my lawyer and accountant for the advice they give me in these areas!

  • RB

    You mentioned you would get a note back from the seller and not secure it to the property because the bank you were getting financing from did not want that high of a CLTV on the property. Did’nt you commit loan fraud when you knew you had or would have another financial obligation that you “omitted” telling the bank about?

  • Thos

    For Yasin, buy “subject to.” It’s not the easiest method, but I do it as often as I can. Essentially, you buy the property by taking over (not formally assuming) payments on the mortgage that is already in place. Google it.

    When I buy on terms, I always start negotiations at 0 down payment and 0% interest. I love those 0% notes, and I focus on a higher than typical payment to get them, even if the property does’t cash flow particularly well at first. They are easy to assign, too, and collect a fee for. Not that I do that much!

  • http://twitter.com/RevNYou Julie Broad

    Hi Bill – a friend of mine wrote a short and to the point article on this subject. You might find it helpful: http://www.billonbusiness.net/a-word-or-two-about-investors-and-safe/

  • Maggie

    Hi- New to this blog. Does anyone from REI answer our questions, or are we, the public, supposed to answer? Also- If someone does answer the questions posed by, say, Yasin, above- Do the responses get posted so all can see? I am very interested in all three of these questions, so rather than post them again myself, I’d like to see what kind of responses they get.

    I am particularly interested in the effect of SAFE in Florida.

  • Debby Verbeten

    Hi Sybursu,

    My name is Debby. I am a Seller Financing Specialist. Our company, All States Investment, LLC, creates owner carry back notes across the country. Please call me to discuss your situation.

    Thanks,
    Debby Verbeten
    All States Investments, LLC
    http://www.AllStatesInvestments.com
    800-985-0599

  • Sosa_e

    Where did you get this information? Are you sure about this? It is my understanding that it was proposed, but not been past yet. I can be wrong. I’ll have to do my own research again.

  • Dsenclair

    What happens if the seller stops paying the mortgage and the bank forcloses on the property?

  • Roman

    How can someone buy a REO from the bank using seller financing?

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