Benifits and downfalls of seller financing

19 Replies

What are the up and downs of seller financing?

I'm thinking about asking a seller if they are interested in holding the mortgage, but I know I will need to educate them and myself on the topic.

I have no experience with seller finanacing.

Erik, really, right side of the header, the magnifying glass, that's the search function. Enter "benefits of seller finance", you'll find over a thousand of posts.

Your question could fill a book. Read some and target more specific questions, we'll jump on them. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Yes, I will start a search. Figured I would get the discussion going. Ill be back

Seller financing is probably most likely to be a win-win situation where the owner is house rich, but doesn't have a particularly high income.  In that situation, the owner turns the asset that requires maintenance into an income stream.

With low interest rates available even for investment properties, seller financing isn't usually a huge incentive.

How about tax benefits for the mortgage holder?

Yes, the biggest incentive to a seller is that the gain on the sale is deferred. Interest earned is regular income. Interest can be higher than what they could otherwise get. They have an annuity income, secured by a property they know well.

Do not pay more for the property for financing, financing does not add value to a property.

Search for loan servicing and select a servicer to administer the loan.

You get a cheaper loan, no points can be charged or other expenses to obtain the financing that will effect the APR.

If this is consumer financing, owner occupied, Dodd-Frank may apply. :)

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill Gulley  

That sounds like an attractive situation for myself and the seller. Based on the numbers in my head (and using a online mortgage calc) even at a 4% interest rate the seller/mortgage holder stands to make about 50K on a 15 year note.

Can anyone chime in on what a down payment should be or typically is on a seller financing situation?

As far as a down-payment, I would probably offer 10% and see what the owner says.  

@Erik Schubert  In a seller financing situation, the down payment is what you and the seller agree upon.  You have infinite combinations of down payment/interest rate in your arsenal but you need to find out what the sellers needs are.  Can they defer the gains over 15 years, as you mentioned?  Can they do this with no down payment?  2000 down? 5000 down?

Originally posted by @Bill Gulley :

Search for loan servicing and select a servicer to administer the loan.

You get a cheaper loan, no points can be charged or other expenses to obtain the financing that will effect the APR.

Bill,

I am wondering if you meant for these two thoughts to be together?  Do you mean with a local loan servicing company they won't need to charge points, etc. because they are not a large banking institution regulated by red tape?  You had a great point, too, about not paying more for a home just because you are using seller financing.  Thanks!

@Erik Schubert

In my experience, in this market, it would be a steal to get 4% seller financing - More common in my market is 6% - 8%

My current thought is to go in with an offer of 0 down, and 4% on a 15 year note.

In all honesty, I'm thinking I don't want the property otherwise.

I have to be careful as I do not believe the seller has even given thought to seller financing. So I will need to educate them at the same time. So I don't want to blind side them

Originally posted by @Drew MacDermott :
Originally posted by @Bill G.:

Search for loan servicing and select a servicer to administer the loan.

You get a cheaper loan, no points can be charged or other expenses to obtain the financing that will effect the APR.

Bill,

I am wondering if you meant for these two thoughts to be together?  Do you mean with a local loan servicing company they won't need to charge points, etc. because they are not a large banking institution regulated by red tape?  You had a great point, too, about not paying more for a home just because you are using seller financing.  Thanks!

Getting a loan servicer has benefits for both parties and well worth it. "Local" servicer might be nice if there is one, they don't need to be local, there are national servicers that will work just fine. A servicer will charge a fee, it can be paid by either party or both. Servicing fees are not part of the APR unless the borrower is required to pay them.

A seller financed note is financing equity based on a sale price, not cash, the sell is not to charge points or fees for making the equity loan available. A RMLO may charge a point or some fee to underwrite a seller financed loan, that is not going to the lender, but for a required service.

Points on a loan are pre paid interest, you can't have pre paid interest on equity out of an installment contract, "installment contract" is one financed by the seller of the goods (installment loan) regardless of title conveyed, title may or may not be conveyed. :) 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

Wow, @Bill Gulley  

There's a lot to learn based on that last response.

I spoke with my RE lawyer, I left with the impression that he can handle the entire transaction, from the contract to closing....

@Erik Schubert  In addition to the myriad of opinions from the BP community, there are some great books on the topic of seller financing. Amazon is a great search engine!

My friend John Schaub's book(s) come to mind at the top of my list. Jimmy Napier's Classic "Invest in Debt" is pretty crude and anything but literary, however it does give you a perspective from the note holders vantage point. 

I think the real advantage for you and seller is that you can strike a deal that makes sense without the constraints of third-party guidelines. 

Your best bet is to target sellers who want to sell and need a secure place to hold their sale proceeds and prefer a monthly payment to a lump sum. Also, sellers who need to sell due to financial pressure and are willing to accept a delayed payment or terms. 

The real money is maid in the back end as sellers (or their heirs) "come back to the well" and ask for early payoff. You then have another time point to negotiate a discount, etc.

Originally posted by @Erik Schubert :

Wow, @Bill G. 

There's a lot to learn based on that last response.

I spoke with my RE lawyer, I left with the impression that he can handle the entire transaction, from the contract to closing....

And, he probably can, servicing is the collection of payments after closing. :) 

Medium logoscopiccroppedblue2Bill Gulley, General Real Estate Academy | https://generalrealestateacademy.com

@Bill Gulley  

Ahhhh! I searched for "loan servicing" and though I found companies, I did not really gain any knowledge. 

Thank you all for your wisdom, some of this stuff would take me hours to figure out.