Mortgages & Creative Financing

Bank Won’t Lend? Cut Them Out! How Seller Financing Works

Expertise: Personal Development, Real Estate Investing Basics
22 Articles Written
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When banks tighten up lending, the best real estate investors begin to leverage more favorable lending strategies. One of these strategies is seller financing, also called owner financing. This strategy can allow homeowners to sell their home faster because buyers can benefit from lower qualifying standards and down payment requirements.

What Is Seller Financing?

Seller financing is when the seller of the property loans the purchase price to the buyer. In this situation, the seller basically becomes the bank and holds a note for the buyer. Based on agreed-upon terms, the buyer then pays the seller back, typically every month, until that loan is paid in full. Should the buyer default, the seller can foreclose and take the property back.

This is a great opportunity for real estate investors because it allows for the purchase of property without having to rely on a bank. If you have bad credit, or you have reached the maximum amount that a bank will loan you, you can tap into this strategy and continue to grow your portfolio.

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These loans are typically shorter-term, with amortization over a 30-year period and a balloon payment due in three or five years. This timeframe typically works because it allows the buyer to build equity in the house and ideally have improved finances or more favorable market conditions to refinance the loan. But the terms are always negotiable. While the terms are generally worse than what a buyer could get from a bank, buyers can save a lot in origination and other fees by pursuing this strategy.

The buyer signs a promissory note with the terms of the loan and either a mortgage or deed of trust. This allows the seller to foreclose on the property if the buyer does not pay. Title is fully transferred to the buyer, and the buyer is free to refinance or sell the house at any time.

Related: The Definitive Guide to Using Seller Financing to Buy Real Estate

When Is Seller Financing an Option?

In order to leverage seller financing as an option, you have to know that the seller has the ability to support this type of financing. When the seller has equity in the house, they are best suited to accommodate it. If a seller owns the property free and clear, then they can fund the entire purchase.

Alternatively, they can still leverage this strategy if the buyer’s downpayment covers what they owe on their existing mortgage, and they can pay it off at closing. If not and there is still a balance owed on the mortgage, the seller’s lender will have to agree to the transaction. 

How to Take Advantage of Seller Financing

Once you know that they have the ability to seller finance, you then need to communicate with the seller that this is an option you are looking to pursue and start the conversation. A lot of sellers may not even be familiar the concept or typical terms. But it never hurts to ask the seller if they’re capable of doing it and willing to entertain the option. 

If the answer is yes or maybe, then the negotiation begins. 

The best part about seller financing is that you can get as creative as you’d like with the terms, agreeing to whatever is suitable for both you and the seller. This includes but is not limited to negotiating both the down payment and the monthly payment. Offer what makes sense to you, and negotiate with the seller to come to something that you can both agree on.

Related: Seller Financing: Benefits & Drawbacks Investors Should Know

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How to Approach an Owner About Seller Financing

Buyer: Is there any room for seller financing?

Note that you may have to explain what owner financing is at this point. Sometimes real estate agents don’t even understand it, so you may have to educate both the seller and the agent. I’ve also found that connecting them with an expert is much more productive than trying to advocate as an interested party.

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Seller: It’s possible.

Buyer: I’d like to make you an offer. I can pay $5,000 over asking price if you can finance the home to me.

Seller: On what terms?

Buyer: I can give you a 10% down payment and pay 5% interest over a 30-year period.

Seller: That’s too long, I can’t hold a note that long.

Buyer: We can keep those terms and have a balloon payment due after 5 years.

Seller: OK, I will consider it.

Related: Negotiating Seller Financing: The Definitive Guide

Obviously, this is very simplified and the conversation likely won’t be this easy, but you will never know unless you ask!

The lesson here should be that if you don’t have good credit or enough for a 20% down payment, you’re not disqualified from purchasing a home. This is just one of the ways you can still buy real estate without meeting the bank’s requirements.

Considering buying or selling with seller financing? Why or why not?

Comment below!

Erin Helle is an Army veteran turned entrepreneur specializing in flipping houses, turnkey renovation products, and real estate investor coaching...
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    Gage Edwards Lender from Des Moines, IA
    Replied 6 months ago
    Great article! Seller financing is a great strategy and one I consult my clients on. One strategy I mention is to offer seller financing with the intent of refinacing the seller carry note with a private lender. This gives the seller the peace of mind they'll receive their money at a future date. It also allows the buyer to inexpensively purchase the property, make any necessary repairs and use the property has leverage (cash-out refi) to acquire additional properties.
    Bernard Evans Investor from SLC, UT
    Replied 6 months ago
    Can you provide more details on how the "seller financing with the intent of refinancing ..." works? Is there an option for the following: Purchase price is 400K. I do 200K through the bank and the other 200K through seller financing. In 3-5 years refi the entire property, paying off the seller?
    Byron Hunter Real Estate Agent from Dallas, TX
    Replied 6 months ago
    Hey Bernard, Good questions. Considering the fact that all things are possible, this challenge in this example would be the collateral. Both lenders (the bank and the seller) are going to want first lien to the property so that if, for some reason down the road, you are unable to make your payment, they can foreclose on you and repossess the house. The most likely scenario would be to list the bank as first lienholder and list the seller as second lienholder. If both lenders agree, then it could work.
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    Thanks for sharing. I see the collateral and lien position being an issue, but if you can find someone to do it, good for you!
    Jacob Stock Rental Property Investor from Nashville, TN
    Replied 6 months ago
    Love the article thanks for writing! Have you had success using title companies to help structure the owner payments or what servicing company do you use?
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    Yes! The terms are agreed to on the contract and the title company drafts the note to match. They don’t service the loan but there are companies that will do that.
    Barry H. Investor from Scottsdale, AZ
    Replied 6 months ago
    ERIN - super article. I ONLY do seller-financing now with my Turn-Key full remodeled tenant-occupied SF and Multi-Fam properties in Kansas City MO. As a lender, I know the collateral is excellent because I built it !! My Buyers love it because I do NOT charge for: Points, Lender's Title Ins, Loan Doc Prep Fees, PMI, Loan Orig Fee, Appraisal or Inspection (unless the Buyer wants to pay for one), and I have NO PREPAYMENT penalty, so the Buyer can refinance at any time in the future. The Buyer / Borrower just needs to come to the table with 25% down (typically $12K to $20K) and they hit the ground running, earning typically 20%+ annual ROI. Closing on the property is about $800-$900 (with my financing) vs $3500-$4000 for bank financing. It these uncertain times, banks are changing their guidelines / rules monthly, if not weekly. It makes so much sense to just get ride of them. Again - great article.
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    That’s amazing! I love it!
    Chatchai Khaokham
    Replied 6 months ago
    Very good article!!! I'm looking to purchase this Quaduplex . seller bought it for $250K only had it for a year and put in very little money to improve the place but it was a slumlord quality type of improvement. Asking price is $350K I could ask for owner finance but I'm sure he still owe on it . But at the sametime I feel stupid paying that much knowing he'll make $100K even thou its a good deal in my opinion becasuse good location and I know I can ask for more rent if I fix up what he butcher as little as $8K-$10K. Question is how do I get over that mindset or just walk and find another deal? Sorry I went off topic a little lol...
    Romeo Danais
    Replied 6 months ago
    Do you really care if he paid $100K for the property or $600K for it? If you are buying for a price that makes sense to you, then buy it. In the long run you won't care on iota about his profit, only about how much you make! Stop being penny wise and dollar foolish!
    Chatchai Khaokham
    Replied 6 months ago
    Thank you for the ass kicking, you're right I can't chang the past but I can plan for future.
    Vaughn K. from Coeur d'Alene, ID
    Replied 6 months ago
    I just made an offer on a house where Zillow shows they bought it for almost half what I would be paying 5 years ago... Yet it still has a couple tens of thousands of dollars of equity to be built with fixing it up, and it would bring in around double in rent per month what the mortgage payment would be... It's annoying I didn't get to buy it for half the price a few years ago, but I'll still make out plenty well. Just get over it!
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    Totally agree with Vaughn and Romeo! Who cares what anyone else paid...make an offer based on the numbers that work and stand behind that number!
    Romeo Danais
    Replied 6 months ago
    You guys are only thinking of the Buyer benefits! How about the Seller benefits? If the Seller sells and receives 'all cash', what the hell its/he going to do with (insert dollar amount here)? Put it in the bank? Are you kidding me? The bank will pay as high as - and this is maybe - 0.5% (that's one half of one percent! If inflation is as low as 3%, then the Seller loses 2.5% on the value of the $$ s/he has 'invested' - really, 'loaned' - the bank! If the Seller carries the financing, a) the interest rate may be 4% or 5% - way better than the bank, and, b) the Seller does not have to pay capital gains tax on the entire profit, just on the portion s/he receives at closing. The remainder of the tax is paid as principal is received. Hello! Is anybody thinking of the benefits to the Seller?
    Vaughn K. from Coeur d'Alene, ID
    Replied 6 months ago
    Dude, depending on the situation the seller may be getting A LOT more than 4-5%. But yeah, for a 100% collateralized loan with a good amount of equity for head room, it's all a decent return. Especially when the stock market is arguably still over valued, RE (in many areas) doesn't have much short term upside left, etc. It can be a great decision for somebody who doesn't need the cash at the time. Technically with some structures, like doing a lease to own, they can even retain the mortgage interest deduction. There's a lot of upsides for a seller.
    Steve Hyzny Investor from West and south of Chicago
    Replied 6 months ago
    Why does no one mention the downside for the seller, they have to pay full taxes on the sale and may not have the money to cover if they loaned it to buyer. This could hurt many sellers not aware of the tax liability.
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    This is not true. If the seller reports that sale as an installment sale (which is exactly what it is), they spread out the gains over time and only pay taxes on the income as they receive it.
    Jared Stasch
    Replied 6 months ago
    Gains are spread out over time but depreciation recapture happens in the year of sale. That is something no one ever talks about and can be a killer.
    Romeo Danais
    Replied 6 months ago
    This is your opportunity to use your brains instead of your emotion. Start off by finding older individuals that are wealthy. Think about this for a minute, where are they placing their hard earned $$ to maximize yields to them? The bank? No! The stock market? No, they may as well gamble the $$. How about real property secured loans? I started out working with a fellow that had done well and was more-or-less retired. He had plenty of cash in the bank doing very little for him and wanted a better return on his $$. This was back in the 70s & 80s & 90s. I would find a screwed-up property that I had under contract, I would bring him and show him the property and the comparables and show that I was getting a very good price and ask him to finance the down payment and even the fix-up $. He would tell me to 'open escrow' with a particular escrow (closing agent) company. He said, 'bring pictures for me at closing!" In a week or so, we met at the closing, I handed him an envelope with 'pictures' one hundred dollar bill for each thousand he was lending me ( a 10% up-front charge to borrow from him - tax free to him) and he would hand over a bank check to the closing agent. I would sign a note and mortgage for the loan at 10% interest, payable interest only each month for 3 years. You could argue that I was paying a whopping 13% interest on the loan. How dare he demand so much? Did I care? NO! Because I bought he property, renovated it and either sold it or rented it and refinanced it over time and made an infinite return! Infinite return! 'Cuz I had no $$ in the deal! My 'Sweat Equity' gave me many thousands of $$ return on the sale/refi of the property. My 'benefactor' and I did many 'deals' like this and we both came out very well. He made way better than the bank would have ever paid and I was able to buy property when I had next to zero $$ and make great profits. I will never forget that guy and will always hold his memory dear to my heart We both made out. Do not dwell on how much you pay for capital, dwell on how well you'll come out of the deal!
    Vaughn K. from Coeur d'Alene, ID
    Replied 6 months ago
    That's the way to do business: Win-win. It is possible for everybody to go away happy from a deal, and that is what one should always strive for!
    Vernon Miller Investor from Crossville, Tennessee
    Replied 6 months ago
    Great article ! Creative financing works everytime!
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    I agree! And it’s lots of fun!
    Anthony O. Porter Rental Property Investor from Atlanta, GA
    Replied 6 months ago
    Thank you Erin for posting. This is a great article. A win-win situation for both the seller and the buyer. The seller does not pay taxes on the entire selling price of the property, only on what was received in that tax year and the buyer in most cases does not need to come up with a large down payment. Also, the contract or promissory note can be drafted in a way that the buyer pays a lump sum towards the prinicpal each year so that at the end of five years the amount left on the principal is not significant. The buyer could also refi after a few years and pay off the remaining principal balance. Just a win-win situation.
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    Very true! The terms can be virtually anything as long as everyone agrees!
    Bob Wolf Rental Property Investor from Woodbridge, VA
    Replied 6 months ago
    Great article! Thanks for publishing it for those who want to learn another alternative to expand their empire. This will be perfect for the house across the street from me. The house is paid off and they are retiring to Maui, Hawaii. 3-5 years to renovate/update the 30+ year home would be perfect! Love the recommended approach with the seller.
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    Awesome! Good luck!
    Jag C. Rental Property Investor
    Replied 6 months ago
    Great article thank you. Does this strategy work with 5+ MF units?
    Erin Helle Investor from Monterey, CA
    Replied 6 months ago
    It can! All you have to do is ask!