Seller Financing. Good idea?

Question

We're selling a few houses in Memphis, and we have interest (letter of intent), on one house that's requesting, "Seller Finance". They're offering a few thousand more than asking and will also pay agent fees. Our agent is not an expert on this type of deal but suggested a short loan term of 3 or 4 years and a balloon payment and written up by a lawyer. I've always steered clear of anything like these offers. Has anyone done any of these types of deals?

Thanks for any knowledge on this.

Chris Seveney · Answer

If the houses are in decent shape and could get traditional financing do not sell seller finance. Bird in hand is better than 2 in the bush, especially when the two in the bush do not have the money.

we are seeing a lot of companies now try and get seller financing and then arbitrage it to renters - similar to STR arbitrage but just arbitrage it with a loan and collect the rent and if the tenant stops paying they walk away and you are stuck with the home, the foreclosure and the subsequent eviction.

Bob Beach · Answer

OK, I see lots of information that I did not think about. The house is under $100k which our agent says it's harder to get a loan on this amount. So, the seller finance makes more sense. But the $2300 down payment, $2500 over asking and paying the fees seems, not quite right. Our goal was to get rid of our older houses which need more maintenance ($$) and invest in fewer but newer houses. We're trying to get rid of the added stress of monthly repairs and simplify things. We have a couple newer houses, and they are almost invisible, just a monthly income. That said, hiring lawyers to write contracts, background and credit checks on strangers that already look nefarious may just add to the stress that we're trying to get rid of. Especially, if the deal goes sideways in a year or two. I see some good info about down payments being bigger, buyer damages the house then defaults, etc.. Another odd thing was the same buyer added a second option of a cash purchase that was close to half the asking price. Maybe to have extra cash for repairs.

Anyway, we've made a decision, based on all the advice and knowledge from everyone here, to continue to look for a real buyer.  Thanks for all the great advice. It's very much apricated.

Steve K. · Answer

I’ve used seller financing as both a buyer and a seller and it can make a lot of sense in certain circumstances (for example I used it as a buyer when I reached the maximum number of conventional loans I could get, and I’ve used it as a seller to both increase my net proceeds (due to collecting interest as “the bank” in addition to the sales proceeds) and to lessen my capital gains tax hit by spreading it out over a few years).

The red flag here for me would be the willingness to overpay when they’re not bidding against anyone. Why would a smart investor do that? That sounds like a strategy that some of the YouTube gurus are teaching to wannabe investors with no money or experience and that is going to end up with a lot of deals going sideways as these buyers will probably fail because overpaying is obviously a bad strategy to begin with. So first of all make sure you’re not dealing with somebody clueless like that because they would be considered high risk to lend money to. Why are they wanting to use seller financing? If they are legit and you don’t have any other offers then I’d have the conversation with them but I’d want a higher than normal down payment (ideally 50% or at least more than the normal 20%), a higher than normal interest rate (at least a point above the prevailing rate so like 9-10% right now, but you can structure it as interest-only payments so their monthly payment is still lower than conventional), amortized over 30 but with a balloon in 3-5 years, something like that. The buyer would need to show solid financials also of course (good credit, experience operating rentals, proof of funds for down payment and adequate reserves to cover any unexpected cap ex).

You can secure the property with a promissory note drafted by a lawyer or a title company, but keep in mind that “taking back the property with the note” as it is often pitched by gurus is not always actually that simple. You may end up needing to go through the whole foreclosure process which can take a lot of time and cost a lot of money, and you may end up getting the property back in much worse condition than when you sold it, potentially with a squatter in it and months of lost rent, and in a worst case scenario you will be in a much worse position than if you had just sold it outright. That’s the risk. So vet the buyer very well.

Also think about the property. Is the buyer going to have the same issues with the property that you’re having? Will they have trouble making the payments to you while also having enough money to keep up with the maintenance and repairs/ tenant issues/ all the expenses involved with owning the property? If so then the chance of them defaulting on your seller finance terms is high and you’ll still be affected by the same problems with the property that exist now, you’ll just have much less control over it so your risk “being the bank” on this property is going to be high.

JD Martin · Answer

Well, without any kind of significant cash on their end there is going to be a much higher chance of default. A lot of seller finance asks are from people who have no money or credit so horrendous no one would give them a loan. That's not everyone - some legitimate players may just be short on cash because of projects (I've been there) - but it is a lot of people.

You definitely want a legal agreement that's forecloseable, getting as much front money as possible so that you're not just in a lurch with nothing if/when they default, and you should get better interest terms for "being the bank" AND I would qualify the buyer just the same as if they had to go to a bank, because you want to know who your partner is in this deal. If all that passes muster, then it could be decent for you if you really want to get these moved and interest is slow. Keep in mind that legitimate players here will usually finance you out of the deal as soon as they are able unless your terms are better than what they can get from trad financing.

Jonathan Greene · Answer

There are a million spammers now just asking for seller finance on anything. I am betting you didn't put this (or the other ones) home on the market to then become the bank for someone who only has a couple thousand down and no credit instead of selling to a verified buyer, right? It's fake. Even if it's real, how does this serve you now? If you are looking to avoid cap gains on one, ok, but paying you a little more to become the bank is not whipped cream on a sundae to me, it's like one old walnut. If they want to severely overpay, cool, but as others have said, the risk of default in this case is probably high 98th percentile.

Jordan Ray · Answer

That's great Bob! Great decision! Gotta love the forums!

Jordan Ray · Answer

Hey Bob! I would be extra cautious entertaining these types of offers. Lots of them are fake buyers and are actually scammy wholesalers that have no idea what they are doing and they will waste your time. Ask your agent to check the buyers track record, portfolio if possible and verifying it with the tax assessor and also ask for proof of funds as a bank statement. He will also need to check the bank statement to make sure its legit. I saw an offer like this one recently with a Navy Federal bank statement that "had $700K" in the bank and it seemed legit.. but the LLC wasn't active with the state and they had assignment of contract language all over it. The red flag for me was common sense. Why would they make an offer for seller financing with a low downpayment but show they have $700K in the bank. Ridiculous right?

Bob Beach · Answer

Hey Yea! Thanks for the heads-up!!

Ian Kay · Answer

Hey everyone! BP Real Estate Podcast producer here. Just a heads up that Dave Meyer and Henry Washington answered this question during the podcast episode we published yesterday (Ep. 1,057). You can check out their thoughts on how to approach seller financing here: Making Your Primary Residence the BEST Investment Ever (Better BRRRR!)

Chris Seveney · Answer

I would prefer to pay the capital gains today as based on how we spend money as a country, that capital gains rate most likely is going to be heading up in the future not down.

Seller Financing. Good idea?

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