Seller financing……is it risky???

Question

Hello everyone,

I am hoping someone can give me an insight on seller financing. I have a couple of rental properties that I have owned for a few years (purchased through your typical mortgage with a bank).

My realtor presented me a property that was being sold by an investor who is offering seller financing, which is a first for me. The rate is 8% interest with a 6 year ballon (10K down on the property, which is being sold for $110K). The monthly payment includes taxes and insurance and will likely be off set by the monthly rental income. So I will be breaking even every month.

My question is, what are the risks in seller financing? Does this sound like a bad deal? My plan is to let the renter pay off the debt for a couple of years, then refinance or the home via bank loan at which time hopefully I will owe roughly 50-70 percent of what originally purchased at.

Can anyone please share their experiences with seller financing and tell me what you think? I appreciate any and all of your input.

Thanks,

Ali Kattan

Tracy Tippett · Answer

Hello Ali Kattan,

You can certainly minimize your risk by insisting of a full compliance title search and transfer.  Make sure you have the documents reviewed by a competent real estate attorney.  Make sure you calculate the ROI and can quickly move to profitability.  Make sure there are no pre-payment restrictions.  I have purchased with seller financing and other than some personality quirks, it has been quite rewarding.

Good Luck!

JD Martin · Answer

I see your biggest risk as a property that's being sold for $110k. After the real estate run we've been on for the past decade, accelerated in the last couple of years, anything that's cheap at that level is either a wreck in need of serious rehab or in a really sketchy area without any realistic hope of appreciation. As such, "breaking even" is probably not going to happen as you are unlikely to make it 6 years without spending something significant on capital expenses, not to mention maintenance and likely vacancies. In fact, I find it's likely the seller is offering this because no one can get a loan on this property and their only exit is to find a cash buyer, who will want a significant discount, or offer seller financing to get someone else on the hook for it.

With the little information you've posted, I would probably walk away from this "deal".

Bob E. · Answer

@Ali Kattan  I see the biggest risk in this as the balloon payment in 6 years.  That said it is manageable but if rates are higher, property values fall, or banks tighten their standards you may have to come up with that balloon.  If you can manage that risk you should be fine.

Eliott Elias · Answer

It’s not as scary as you’d think. Most the risk is held by the seller, but most the gains are held by the seller as well. It’s a great way to own a property without going through a bank and putting a large down payment

Chris Seveney · Answer

@Ali Kattan

Treat it like a traditional sale and financing transaction but seller is lender. You will want warranty deed on property and it be a traditional mortgage/deed of trust and note

Don’t do a land contract.

Ali Kattan · Answer

@Tracy Tippett

Thank you so much for your reply! Is a Title search and transfer something that guarantees me the home is free of any holds or Leins on the seller’s end? Is this something I ask the seller or does my real estate attorney do that?

Again, thanks for your reply!

-Ali

Seller financing……is it risky???

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