Seller Financing- What should I watch out for?

15 Replies

Long story short (details to come if need be). I had a sudden need to move 80 miles away. Right off the bat I lucked out and found a house that was very close to my ideal home, and the seller wants to do seller financing. Sadly, I wasn't prepared to be buying a house and recently paid off some student loans, so I'm short on cash. Only after a short phonecall it sounds like he'd consider a couple of balloon payments instead of a larger down payment, which I'm fine and capable of. He just inherited the house. They're asking the amount that the taxes are assessed for, but zillow values it at about 20% more than that.

Anyway, if I go ahead with seller financing, is there much that I need to "look out for"? I've read/listened to a lot about it in real estate investing materials, but wasn't expecting it to be in my reality so soon. He seems laid back. He's ok with a bank loan. My only fear, which now seems unlikely, was that he would be against it being paid off early. So, anything that I'd need to think about or consider with seller financing that I wouldn't normally worry about when doing conventional? I'd still get it inspected. We'd have to discuss terms for taxes and insurance. Etc...

Oooh. Just did some reading-

clintcoons.wordpress.com/2013/10/16/seller-financing-is-about-to-get-ugly-on-january-10/?utm_source=Coach+Carson's+E-Newsletter&utm_campaign=d4d7a6f657-Enewsletter_3_practical_tips_grumpy_old_pro&utm_medium=email&utm_term=0_ff82b2a4cc-d4d7a6f657-317307093

Does this meant hat I cannot offer a balloon payment with these new rules? Hmmm...

Get proof of ownership first, if he claims he inherited the property.
How long will he carry the loan for?
5 years or longer is great.
Get roof, pest, property, fireplace, etc. inspections
Check with title company or attorney who ever does that in your state to find out about requirements to draw up seller carry-back loans.
Are you using a real estate agent to assist you? If you are, they can guide you.
Maybe talk to the neighbors - if can't give you much information about the property.

Much appreciated and a good start!

I think this guy might carry a full 30 year loan. He offered at 4% interest too... Sounds like he is laid back and just wants to get paid.

No real estate agents. I'll try to check on all of those things.

I'd make sure there is no penalty for early payoff after 1 or 2 years cause, as you found out, life happens. Also, instead of balloon payments, perhaps you could fix that with some promissory notes, which, legally are quite strong for the seller.

Kelly

Obviously I shall google that, but I'll admit that promissory notes are something I've heard tossed around, but I've never read into them. Is it much different? Is it basically a way to contractually have me commit to paying them, but a loophole so that it does not interfere with the new seller financing laws?

Ok, so my new question(s)...

I've never done this without a bank NOR a realtor. If I make an official offer, and it gets accepted, I'll then get all of the inspections and stuff done. Assuming that all is good, do we just find a template seller financing form and fill it out and then I have an attorny look it over?

Joe,

Not up to date on new seller financing rules, just thinking out of the box with promissory notes. In my state, we use title companies, but in others, an attorney closes the deal. I would just lean on them for the proper paper work AND call them up, explain what you want to do, I'm sure they will be glad to help and point out things to consider. Its what they do, talk to the experts.

Kelly

@Michael C.   made great points.

1. Dodd frank is concerned with seller finanncing owner occupied.

So go to a RMLO, what state are you in?  (that a Reg Mortg Loan Orgin).

The RMLO knows the ATR rules and DF and Safe Act.

Then look at clear title, and make an offer.

Then see an attorney that gets owner carries, ask the RMLO for a good one.

FWIW I'm in WA state and we also use title companies.

Always have title work done on any real estate transaction. You'll find out if the property is free and clear of any defects such as leins, easments, any judgements etc.... Just for the sake of knowing what or if anything has to be addressed prior to purchase.

Joe - I was about to make a post with useful content until I noticed that you had not taken the time to complete your profile. Happy to help once I see your profile.

Originally posted by @Rick H. :
Joe - I was about to make a post with useful content until I noticed that you had not taken the time to complete your profile. Happy to help once I see your profile.

Don't leave me hanging Rick...

Good job; you now have a profile!

There are some great books on seller financing, John Schaub and "Fixer" Jay Decima, among them.

The important thing to look for, for starters, is if your seller is a professional or not. If they are, you are playing 'their game' on 'their turf'. If you're buying a house from a consumer-type, they will be just as clueless as you might be.

Neither Chris Dodd or Barney Frank were big thinkers so don't overthink the statutes.

Seller financing is no more than the terms that you agree to buy a property for. It's an extension of credit but it is not a loan, per se, since they did not give you cash.

Balloon payments benefit the seller, not the buyer. The rule of thumb is to pay slowly as a buyer but collect cash quickly as a seller. The way I work these deals is I determine how much of a payment the house will support as a rental and payments should not exceed half that (because you have expenses, taxes, insurance and your margin to pay). Otherwise, what benefit of owning would you receive?

If you plan to occupy as a residence, only you can decide what terms are acceptable. As to what what out for? I'd say any balloon payment less than 7 years may expose you to a problem if you can't sell or refi within that timeframe.

Breakdown each clause that you want. Have your escrow, title or closing attorney explain what any unfamiliar terms mean and only your attorney or tax pro can advise you of their implications.

Now, since this is an investor forum, I expect you to be looking for investor opportunities for you.

The #1 way to help the poor is, for starters, to not be one of them.

Originally posted by @Rick H. :

Now, since this is an investor forum, I expect you to be looking for investor opportunities for you.


Very true, but this house happens to be for me. I am waiting back to hear if they have accepted my casual offer. I.e. I wrote down the basics of what I could offer, but it was not an official written offer. I hope to hear back that they will work with me.

As far as terms go, I've decided that I'd be willing to pay a bit more, namely because I would be saving on mortgage insurance as well as closing costs. Now, I didn't tell them that, but I am keeping it in mind. This may be a home that we actually live in the rest of our lives. It is at least on par with what we' see ourselves in long term, and it kind of dropped in our laps. It sounds like the other guy is offering a larger down payment than I can, but wants the house at a lower price. One of the two owners said that it is lower than they'd like, but he also seems to be the one less in control. Sounds like big sister has the final say.

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