Seller Financing a Spec Home

4 Replies

I am thinking of ways to create passive income from new construction.  One option is to build new rentals.  However, I was bouncing around the idea of doing seller financing as the spec home builder/owner.  If my future business has good cash reserves, it could be possible to build a new home with no or little outside financing needed.  Then if we did seller financing, we could use the buyer down payment to payback loans (if any) and then sit back and collect the mortgage payments.  Has anyone done something like this?  What are the pros and cons compared with building new rentals?  I know one advantage is that you wouldn't have to deal with maintenance. 

Thanks in advance for any advice that comes.

Jimmy, as a builder you need to check Dodd-Frank, builders have special provisions with seller financing, newly constructed homes and seller financing to your buyer got hammered. 

Now, building rentals, absolutely, just don't be selling them within a year, lease them. The volume you'll need will put you into the operator status, no homeowner occupied exemption for you. 

I assisted with the seller financing for a very large contractor in the Midwest, years ago and that is pretty much the game plan, accept you can assign notes for collateral for other financing, but that's gone now. 

Go build small office buildings or strips, that's commercial and you can do just that! Good luck :)  

@Jimmy Nguyen , @Bill Gulley is on the money! Dodd-Frank is your hurdle..... Doing what you essentially described, Lease Option or Rent-To-Own Sales, can help you get through the legal aspects of what you are calling Seller-Financing.... Get a mentor to help you and always Check with an attorney to assure you are in total compliance.

I build new for rental primarily for the following reason: 1) I am a builder and have the KSAO's (knowledge, Skills, Abilities, and Other) means necessary to efficiently and effectively build; 2) I buy all my land substantially below market value (usually off-market); 3) any land I buy at market has an immediate value-add component that can quickly make it worth more that what I paid for it; and 4) Cap Ex is generally MUCH less for new construction which means a stronger cash flow up front, but you are always going to need to maintain a suitable Cap Ex account if you are truly going to hold for more than I'd say 7-10 years.... but everybody has their separate opinions and thought process concerning what the "right" amount to designate to Cap Ex is proper.....

 And note: infill houses in established areas of development is a pretty safe bet, but when you start getting into multi-units (more than 4 units), I would highly suggest you do a needs assessment and run the numbers on ALL aspects that will affect your true Net.

Now get to work! Go make the RIGHT thing happen! 

Thanks @Bill Gulley and @Rob Harris .  Yeah I've been looking at infill lots in my target areas.  There are some good deals to be had if I get the seller to take 40% off.  I hope to get at least 1 out of 10 to take that offer.  

I really dream of doing large net zero community developments with mixed housing, but also trying to envision a way to keep cash flow coming after the project is done.  I like what Solar City has done by leasing solar panels or doing Power Purchasing Agreements (PPA) and in effect becoming a utility company.  I think that since I will be constructing the houses, it will be less time and cost to put the solar panels up on the houses or ground mount them in community spaces and give buyers the option of buying their solar array outright or paying for the solar energy produced at a reduced cost.  Renters could have the option of using us as their utility to reduce their energy costs and have access to clean energy.

I think renters will be a good market for paying for solar energy through a PPA since they don't own the building or panels.  Buyers, however, may not want solar panels on their roof if they don't want to own them or lease them.  Maybe all the houses for sale will just have electrical chases installed to facilitate easier solar installation so cables don't have to be run on the exterior.  

For PPA's, let's say you can get a unit to pay you $50/month to produce their electricity, how many units do you need to make it worthwhile?  Solar panels require little maintenance over its productive lifetime so the major cost is the upfront cost of installing the panels.  Currently, prices for solar panels are about $1/watt.  Labor pushes that price to $2.80/watt.  Average home uses 900 kwh/month.  A home with a good building envelope that is airsealed and superinsulated could go down to 450kwh/month.  In my area (Northern/Central Virginia), using average solar radiation data, that would mean you would need to have about a 3,250 watt array to produce the energy required by the household for a cost of $9100.  Paying around $50/month, it would take 15 years for payback if you don't take into account any federal or state tax incentives.  

Not sure if this is viable, but I have to do more research.  

Why not just sell them for cash and invest that cash in passive income opportunities? You could even invest in a fund buying notes secured by real estate. Seller financing thrives when either 

1) Interest rates are high

2) Banks won't lend

Rates are low, so that one is out. Banks tend not to lend on properties in the $50k - $75k range. This creates opportunity for seller financiers. If your property is $100k+, you are leaving money on the table by seller financing in todays market. You are either selling to a sub prime borrower, or letting inflation eat away at your note earnings over time.

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