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Seller Financing: Three Kinds Available to You

by Kevin Kaczmarek on July 20, 2011 · 4 comments

  
3 kinds of seller financing

Seller Financing has likely become the single most talked about real estate investing tool in the past few years due to the lending restrictions banks have placed on our industry. Just this past week, a banker told me real estate investing is now considered a “hobby” meaning it is not considered a lending option for banks right now. With that said, wise investors are turning to various aspects of seller financing. What needs to be clarified are the different types of seller financing methods available to you. Let’s take a look:

3 Approaches to Seller Financing

Lease-Option:

Probably the most common approach investors have used throughout the years. You are able to approach sellers and lease a property with the end goal of purchasing the property for an agreed upon price. These investments give investors a predetermined amount of time to exit the property and make a profit. Andrew C. MacDonald contributes excellent posts on lease option exit strategies. I highly recommend reading his work and others for more details.

Subject-To:

The term subject-to sparks strong opinions and debate immediately. The goal of subject-to is to acquire a property with no-money down. This allows you to take over the mortgage payments and you are responsible for satisfying the balance of the mortgage. However, the mortgage is still in the seller’s name. There is great debate as to the specifics of subject-to deals and the “Due on Sale” clause. Jason Hanson’s posts are a great source of information on this unique seller financing concept.

Land Contracts:

This is my favorite kind of purchase and sale. A land contract is simply a mortgage between the seller and buyer. The two parties agree on down payment terms, monthly payment terms, interest rate, and length of contract. At the end of the term of payments the buyer owns the property outright and the seller no longer has rights to the property. This is a great strategy when properties can be purchased on contract with tenants in place who essentially pay the mortgage for you.

As you can see there are many levels of seller financing and we barely scratched the surface. Each scenario varies in the amount of ownership of the asset and the deed. Each has a purpose and can be an important part of your investing career. I recommend studying how each financing model works and using these strategies when putting in offers. It will keep money in your pocket and increase the profits in your portfolio.

Photo: Casey Serin

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{ 4 comments… read them below or add one }

Bill July 20, 2011 at 11:58 am

Good stuff Kevin! I am a big fan of all three of these strategies and use them extensively in my real estate investing, both as buying and selling strategies. The SAFE Act has put a damper on using Sub-2s (with wraps) and land contracts in some states – so I’d suggest running your transactions by your real estate attorney to make sure you are in compliance.

And I concur with your suggestion to check out both Andrew’s and Jason’s posts. Those guys know their stuff :-)

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April July 21, 2011 at 3:53 am

Thank you for sharing this out. The ideas are very helpful especially for realtors.

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Jackie July 21, 2011 at 11:53 am

There are definitely numerous types of financing available. As a real estate investor it’s important to be familiar with all of them because you may want to apply for different types of financing depending on your particular situation.

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Johnson July 23, 2011 at 5:49 pm

Kevin all three of these strategies are fantastic and real.

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