Seller financing advice?

Question

Looking for guidance on exactly how seller financing works. Any success stories?  Risk/benefits?

Thanks in advance

Josh Longtin · Answer

@Alan Grobmeier thank you very much. It certainly sheds some much needed light. Appreciate it.

Alan Grobmeier · Answer

@Josh Longtin, for nice properties, other than luxury, seller financing is almost like a unicorn.  I have seen them a lot, for properties I'd never buy.

In MOST instances, it is a retiree that is selling via owner carry.  The reason is quite simple.  Amortized loans pay mainly interest for the 1st 15-20 years.  The principle is not paid down much.

A retiree NEEDS that interest as income and can't get as good of a return elsewhere.  They, generally speaking, don't have a W2 where the interest income will place them in a higher tax bracket.

Those are the good parts for the SELLER.

As a BUYER you can EXPECT a higher than normal interest rate, and perhaps an investor style down payment required (maybe 20% or more).  The seller will want to make sure you don't walk away 'easily'.

In addition, you can expect at least market price and may experience a higher than market price.  After all, there are no background checks, minimal credit checks, etc.  Seller is saying that as long as you got the money, he/she has the time.

With that being said, I was able to buy a rental property via seller carry.  The property was slightly over-priced at the time.  I had to put 20% down.  The interest rate I got was 5.5%, 30 year amortization, refi in 10 years or less.  That was 4 years ago as I already thought prices might be kind of high.  If prices fell, I wanted to be able to make it through to the next real estate 'peak' without losing the property.

I eventually refinanced the property about 1.5 yrs later at a lower interest rate.  The property has now increased in value.  The rent has increased by $300 a month and it is a great performer in my portfolio.

With regards to 'initial financing options':  Your best deal is going to be 20% down, good credit, from your local bank.

I was already up to 6 loans at the time and getting additional loans was going to be problematic.  And that is the reason I went with owner carry route.

Hope that helps.

Alan

Josh Longtin · Answer

@Brooks Rembert

Thank you very much. Seems like an optimal situation for both parties. Appreciate the insight. As a first timer, the initial financing options are keeping me up nights. I will look further into this👍.

Brooks Rembert · Answer

Hi @Josh Longtin,

The pros for the seller include continuing to get a monthly check, but without having the headaches of being a landlord...

Plus, by holding the note, they safe a huge chunk of tax bill to Uncle Sam this year. By only paying tax on what you pay them each year, they spread out the tax hit over a number of years vs. paying a big chunk of moolah this year.There's really no set interest rate. It's all negotiable. Some sellers will go for 0% and some may want 2-3% above a typical bank financed rate.

It's good for you as the buyer because you can avoid applying for a loan and many times can get a better rate than you would be able to normally.

Seller financing is MUCH more flexible in most cases.