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Travis Felchlia
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How does seller financing work?

Travis Felchlia
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Posted Sep 27 2022, 09:45

I'm looking to buy my first BRRRR strategy, it's also going to be my first home while we remodel, I don't have a lot of cash saved up for the down payment/closing costs. I was just curious if anyone could give me a little more info on seller financing than what I've learned so far. From what I understand, when you get the seller to finance, you make payments to the seller until the down payment is paid off for that property, but how long do you pay? I can't imagine someone would want to pay my down payment then wait 30 years to receive all their money back… that would be insane! I'm also pretty sure that if you miss a payment to the seller that you lose the property all together? So do you make the financing with the seller like a 2 year thing then quickly rehab the home and refinance with your bank to get your seller financing paid off? Thanks in advance!

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Tom S.
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Tom S.
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Replied Sep 27 2022, 14:52

@Travis Felchlia Welcome to BP!  I'll lay out an real life example of one of the first seller finance deals I did.  $80k purchase price, 10% down, so the seller financed the rest: $72k, 6%, 30 year amortization (payments = $432 per month).  You're correct that most sellers won't wait the full 30 years for their money, most will insist on a balloon payment in 5-7 years.  So you make your payments for 5 years, and then the balance is due, typically you'll sell or refinance at that point.

In my case I put about $40k of rehab into it over 6 months.  I then went to a bank who appraised it at $170k.  They would lend 80% of that, or $136k.   I'm all in at $72k + 40k rehab = $112k.  So I'll net $24k after the refinance (less closing costs).  That reimburses my original $8k and then some, and I can use that for the next place.  And I still have 20% equity in the rehabbed property.

So it takes work but can be done.  Good luck!

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Andrew Postell
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Andrew Postell
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Replied Sep 27 2022, 15:34

@Travis Felchlia if this is going to be your first home, why aren't we considering a "primary home"?  Why not go that route?  Is something preventing you from going that direction?

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Ke Nan Wang
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Ke Nan Wang
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Replied Sep 27 2022, 15:53

Are you talking about seller financing your down payment to a mortgage? 

A normal seller financing would be the seller holds a promissory note from you that after you pay the seller the downpayment (whatever the amount you and the seller can agree on), you will pay the remaining balance over a period of time for an interest (same thing, whatever you guys agree on). Basically the seller is acting like a bank. 

Usually your Frannie Mae, Freddie Mac loans are much better than a seller financing deal. You would only go to exploit the seller financing route if either you can't get a conventional loan or for some reason you convinced the owner of the property to give you a better deal than conventional loan. It's very possible, if you are lucky, charming, or whatever found a kind person who's allow you to do that. 

From the owner's point, there is definitely higher risk from doing seller financing. So usually the owner might ask for higher interest than the market rate. Or the owner does not want to take a lump sum of cash but rather take an installment over a period of time (taxes, retirement, trust fund, could be any reason). 

Or, you could also convince the owner to take a second position after the bank. This creates even higher risk to the owner. Say if you'd like to purchase a house for $2Mil and you can only get $1Mil through the bank. You could ask the owner to seller finance the other $1Mil as a second mortgage. However, if you default on the bank's note and the bank foreclose on you, the bank will take the property away and the owner left with nothing. 

There are property owners out there who want to do seller finance to collect the initial down payment and then just hope the borrower default so they can foreclose on the borrower, take the property back and repeat. So these people make money on the down payment. 

All in all, seller financing is very flexible. Basically just comes down to what kind of agreement you can enter with the seller. As long as both of you are adults, with sound minds, not under durress, and there are nothing illegal act in the agreement, you can enter into any agreement to help you purchase the house. Just need to find a lawyer to do the contract.

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Travis Felchlia
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Travis Felchlia
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Replied Sep 27 2022, 19:01
Quote from @Andrew Postell:

@Travis Felchlia if this is going to be your first home, why aren't we considering a "primary home"?  Why not go that route?  Is something preventing you from going that direction?

I’m not sure what you mean, I’m very new to this all so I’m open to other options if there’s a better way!

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Travis Felchlia
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Travis Felchlia
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Replied Sep 27 2022, 19:07
Quote from @Ke Nan Wang:

Are you talking about seller financing your down payment to a mortgage? 

A normal seller financing would be the seller holds a promissory note from you that after you pay the seller the downpayment (whatever the amount you and the seller can agree on), you will pay the remaining balance over a period of time for an interest (same thing, whatever you guys agree on). Basically the seller is acting like a bank. 

Usually your Frannie Mae, Freddie Mac loans are much better than a seller financing deal. You would only go to exploit the seller financing route if either you can't get a conventional loan or for some reason you convinced the owner of the property to give you a better deal than conventional loan. It's very possible, if you are lucky, charming, or whatever found a kind person who's allow you to do that. 

From the owner's point, there is definitely higher risk from doing seller financing. So usually the owner might ask for higher interest than the market rate. Or the owner does not want to take a lump sum of cash but rather take an installment over a period of time (taxes, retirement, trust fund, could be any reason). 

Or, you could also convince the owner to take a second position after the bank. This creates even higher risk to the owner. Say if you'd like to purchase a house for $2Mil and you can only get $1Mil through the bank. You could ask the owner to seller finance the other $1Mil as a second mortgage. However, if you default on the bank's note and the bank foreclose on you, the bank will take the property away and the owner left with nothing. 

There are property owners out there who want to do seller finance to collect the initial down payment and then just hope the borrower default so they can foreclose on the borrower, take the property back and repeat. So these people make money on the down payment. 

All in all, seller financing is very flexible. Basically just comes down to what kind of agreement you can enter with the seller. As long as both of you are adults, with sound minds, not under durress, and there are nothing illegal act in the agreement, you can enter into any agreement to help you purchase the house. Just need to find a lawyer to do the contract.


 Thank you for the detailed response! Currently I have just barely enough to get the down payment for the house paid, the bank wants me to fluff my account up a bit more until they’ll approve me for the loan. The homeowner is currently letting me rent the deal until I can get financing for it. And after listening to rookie podcast #27 I have definitely misunderstood seller financing. I figured it was just a way to get the house without the down payment all upfront. 

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Travis Felchlia
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Travis Felchlia
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Replied Sep 27 2022, 19:26
Quote from @Tom S.:

@Travis Felchlia Welcome to BP!  I'll lay out an real life example of one of the first seller finance deals I did.  $80k purchase price, 10% down, so the seller financed the rest: $72k, 6%, 30 year amortization (payments = $432 per month).  You're correct that most sellers won't wait the full 30 years for their money, most will insist on a balloon payment in 5-7 years.  So you make your payments for 5 years, and then the balance is due, typically you'll sell or refinance at that point.

In my case I put about $40k of rehab into it over 6 months.  I then went to a bank who appraised it at $170k.  They would lend 80% of that, or $136k.   I'm all in at $72k + 40k rehab = $112k.  So I'll net $24k after the refinance (less closing costs).  That reimburses my original $8k and then some, and I can use that for the next place.  And I still have 20% equity in the rehabbed property.

So it takes work but can be done.  Good luck!

Thank you! I appreciate the response, it definitely helped. So from what I’m understanding, the only benefit to seller financing is that there’s no closing costs, and you can negotiate the interest rate with the seller. Other than that it’s no different than going to the bank?

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Wale Lawal
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Wale Lawal
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Replied Sep 27 2022, 19:33

@Travis Felchlia

A bank isn’t involved in a seller-financed sale; the buyer and seller make the arrangements themselves. They draw up a promissory note setting out the interest rate, schedule of payments from buyer to seller, and the consequences should the buyer default on those obligations. Unlike a sale involving a mortgage, there is no transfer of the principal from buyer to seller but merely an agreement to repay that sum over time.

With only two main players involved, owner financing can be quicker and cheaper than selling a home in the customary way. There is no waiting for the bank loan officer, underwriter, and legal department, and buyers can often get into a home for less money.

Read this article for more information https://www.investopedia.com/a...

Good Luck!

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Travis Felchlia
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Travis Felchlia
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Replied Sep 27 2022, 19:55
Quote from @Wale Lawal:

@Travis Felchlia

A bank isn’t involved in a seller-financed sale; the buyer and seller make the arrangements themselves. They draw up a promissory note setting out the interest rate, schedule of payments from buyer to seller, and the consequences should the buyer default on those obligations. Unlike a sale involving a mortgage, there is no transfer of the principal from buyer to seller but merely an agreement to repay that sum over time.

With only two main players involved, owner financing can be quicker and cheaper than selling a home in the customary way. There is no waiting for the bank loan officer, underwriter, and legal department, and buyers can often get into a home for less money.

Read this article for more information https://www.investopedia.com/a...

Good Luck!

Thank you! I appreciate it

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Joe Garretson
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Joe Garretson
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Replied Sep 27 2022, 20:04
Quote from @Travis Felchlia:
Quote from @Andrew Postell:

@Travis Felchlia if this is going to be your first home, why aren't we considering a "primary home"?  Why not go that route?  Is something preventing you from going that direction?

I’m not sure what you mean, I’m very new to this all so I’m open to other options if there’s a better way!

His question is: is this going to be your home, that you live in for a period of time, and not an investment property right away? Like your primary residence? If so, seller financing makes little sense. FHA loans will be a much easier path to get into so many more homes. Seller financing requires a pretty specific situation and a very large portion of homes listed aren't going to match that.

In your original post, you mention BRRRR and first home and remodel... all that leads me and the other commenter to believe this is your house you'll be living in. Find a good mortgage broker locally, get that squared away with a more conventional loan and you'll be on your way. You should look at a 203k loan which allows you to borrow for the house PLUS the renovations. You pay just the 3.5% down on the loan total so you don't have to come up with the reno costs out of your pocket. Seems like a good strategy given your stated lack of funds.

Have you searched here on BP for mortgage brokers in your area? I'd almost guarantee there's one close by you and they will know all the ins and outs to get you setup!

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Travis Felchlia
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Travis Felchlia
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Replied Sep 28 2022, 03:49
Quote from @Joe Garretson:
Quote from @Travis Felchlia:
Quote from @Andrew Postell:

@Travis Felchlia if this is going to be your first home, why aren't we considering a "primary home"?  Why not go that route?  Is something preventing you from going that direction?

I’m not sure what you mean, I’m very new to this all so I’m open to other options if there’s a better way!

His question is: is this going to be your home, that you live in for a period of time, and not an investment property right away? Like your primary residence? If so, seller financing makes little sense. FHA loans will be a much easier path to get into so many more homes. Seller financing requires a pretty specific situation and a very large portion of homes listed aren't going to match that.

In your original post, you mention BRRRR and first home and remodel... all that leads me and the other commenter to believe this is your house you'll be living in. Find a good mortgage broker locally, get that squared away with a more conventional loan and you'll be on your way. You should look at a 203k loan which allows you to borrow for the house PLUS the renovations. You pay just the 3.5% down on the loan total so you don't have to come up with the reno costs out of your pocket. Seems like a good strategy given your stated lack of funds.

Have you searched here on BP for mortgage brokers in your area? I'd almost guarantee there's one close by you and they will know all the ins and outs to get you setup!

Thanks for the clarification, I will be living at this deal but only for 2 years max! The 203k loan sounds like a great way to go, it sounds like I need to look around for different mortgage brokers because the one I talked to didn’t give me any of this information. Thanks again

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Joe Garretson
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Joe Garretson
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Replied Sep 28 2022, 07:02
Quote from @Travis Felchlia:
Quote from @Joe Garretson:
Quote from @Travis Felchlia:
Quote from @Andrew Postell:

@Travis Felchlia if this is going to be your first home, why aren't we considering a "primary home"?  Why not go that route?  Is something preventing you from going that direction?

I’m not sure what you mean, I’m very new to this all so I’m open to other options if there’s a better way!

His question is: is this going to be your home, that you live in for a period of time, and not an investment property right away? Like your primary residence? If so, seller financing makes little sense. FHA loans will be a much easier path to get into so many more homes. Seller financing requires a pretty specific situation and a very large portion of homes listed aren't going to match that.

In your original post, you mention BRRRR and first home and remodel... all that leads me and the other commenter to believe this is your house you'll be living in. Find a good mortgage broker locally, get that squared away with a more conventional loan and you'll be on your way. You should look at a 203k loan which allows you to borrow for the house PLUS the renovations. You pay just the 3.5% down on the loan total so you don't have to come up with the reno costs out of your pocket. Seems like a good strategy given your stated lack of funds.

Have you searched here on BP for mortgage brokers in your area? I'd almost guarantee there's one close by you and they will know all the ins and outs to get you setup!

Thanks for the clarification, I will be living at this deal but only for 2 years max! The 203k loan sounds like a great way to go, it sounds like I need to look around for different mortgage brokers because the one I talked to didn’t give me any of this information. Thanks again

Staying there two years makes a huge difference with capital gains taxes so consider that with your plans. And you're right, you'll have to search hard for a broker who's familiar with the 203k loan. Most of them churn the typical FHA loan for a standard buyer. Have you searched the Network here on BP? Top tool bar, Network -> Mortgage Lenders... you'll find some there who can help.

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Travis Felchlia
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Travis Felchlia
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Replied Sep 28 2022, 07:15
Quote from @Joe Garretson:
Quote from @Travis Felchlia:
Quote from @Joe Garretson:
Quote from @Travis Felchlia:
Quote from @Andrew Postell:

@Travis Felchlia if this is going to be your first home, why aren't we considering a "primary home"?  Why not go that route?  Is something preventing you from going that direction?

I’m not sure what you mean, I’m very new to this all so I’m open to other options if there’s a better way!

His question is: is this going to be your home, that you live in for a period of time, and not an investment property right away? Like your primary residence? If so, seller financing makes little sense. FHA loans will be a much easier path to get into so many more homes. Seller financing requires a pretty specific situation and a very large portion of homes listed aren't going to match that.

In your original post, you mention BRRRR and first home and remodel... all that leads me and the other commenter to believe this is your house you'll be living in. Find a good mortgage broker locally, get that squared away with a more conventional loan and you'll be on your way. You should look at a 203k loan which allows you to borrow for the house PLUS the renovations. You pay just the 3.5% down on the loan total so you don't have to come up with the reno costs out of your pocket. Seems like a good strategy given your stated lack of funds.

Have you searched here on BP for mortgage brokers in your area? I'd almost guarantee there's one close by you and they will know all the ins and outs to get you setup!

Thanks for the clarification, I will be living at this deal but only for 2 years max! The 203k loan sounds like a great way to go, it sounds like I need to look around for different mortgage brokers because the one I talked to didn’t give me any of this information. Thanks again

Staying there two years makes a huge difference with capital gains taxes so consider that with your plans. And you're right, you'll have to search hard for a broker who's familiar with the 203k loan. Most of them churn the typical FHA loan for a standard buyer. Have you searched the Network here on BP? Top tool bar, Network -> Mortgage Lenders... you'll find some there who can help.

I saw there were some, I think I only saw one that was able to help in Illinois, it looked like he worked with first timers but his lowest interest rate was 9% so I’d probably have to run the numbers again on that to make sure it works 
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Wale Lawal
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Wale Lawal
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Replied Sep 28 2022, 12:47
Quote from @Travis Felchlia:
Quote from @Wale Lawal:

@Travis Felchlia

A bank isn’t involved in a seller-financed sale; the buyer and seller make the arrangements themselves. They draw up a promissory note setting out the interest rate, schedule of payments from buyer to seller, and the consequences should the buyer default on those obligations. Unlike a sale involving a mortgage, there is no transfer of the principal from buyer to seller but merely an agreement to repay that sum over time.

With only two main players involved, owner financing can be quicker and cheaper than selling a home in the customary way. There is no waiting for the bank loan officer, underwriter, and legal department, and buyers can often get into a home for less money.

Read this article for more information https://www.investopedia.com/a...

Good Luck!

Thank you! I appreciate it

 Most welcome!

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Jonathan Klemm
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Jonathan Klemm
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ModeratorReplied Oct 2 2022, 09:32

Hey @Travis Felchlia - Seems like you received a ton of great advice above.  We are always trying to pull off seller financing on our Chicago deals. If you are ever in the city and want to link up feel free to reach out and we can talk through the process.

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Travis Felchlia
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Travis Felchlia
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Replied Oct 2 2022, 17:21
Quote from @Jonathan Klemm:

Hey @Travis Felchlia - Seems like you received a ton of great advice above.  We are always trying to pull off seller financing on our Chicago deals. If you are ever in the city and want to link up feel free to reach out and we can talk through the process.


 Thank you johnathan i will definitely let you know when I’m over there! 

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Replied Oct 3 2022, 06:23

Hey there. Question for you. Are you talking about doing a rent to own? 

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Replied Oct 3 2022, 09:30

@Jonathan Klemm

Hello,

Chiming in on this conversation and wondering @Jonathan Klemm if you have done seller financing for both the down payment and the remaining amount? Or just for one or the other? And if you have done an interest only payment period during construction/renovation period and then P+I once the property is stabilized with new tenants in?

We’re looking at a property in Missouri that needs updating, my husband is a builder we would do the work, would like to do seller financing for down payment remaining loan amount with interest only payments while we do the work. We have to get funds to do the work too.

Any experience and insights on this model appreciated.

Thank you

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Jonathan Klemm
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Jonathan Klemm
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ModeratorReplied Oct 6 2022, 09:34

No problem @Travis Felchlia.

Hey @Sylvia H. - Rent-to-own and seller financing are two different strategies.  

Rent to own = would be if you already own the property (typically single family house) and you rent it to a tenant with the option to purchase within a certain time frame.

Seller financing =  Acquisition strategy where the seller acts as the bank and you pay them a monthly payment and downpayment at specified terms to purchase the property.

@Luisa Trigo - We aren't too far from you in Missouri, just a little NE up in Chicago.   The answer to all your questions is yes, as long as the seller (and bank if in the picture) agree to the contract terms.

You can set up seller financing however you want actually which is why it is such a great creative strategy.  You can do seller financing with just the down payment and have traditional bank financing (more typical on commercial deals) the only speed bump is whether or not the BANK will allow it.  You can also set it up for interest only while you add value and then refinance.  Everything is negotiable. 

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Replied Oct 6 2022, 14:35
Quote from @Jonathan Klemm:

No problem @Travis Felchlia.

Hey @Sylvia H. - Rent-to-own and seller financing are two different strategies.  

Rent to own = would be if you already own the property (typically single family house) and you rent it to a tenant with the option to purchase within a certain time frame.

Seller financing =  Acquisition strategy where the seller acts as the bank and you pay them a monthly payment and downpayment at specified terms to purchase the property.

@Luisa Trigo - We aren't too far from you in Missouri, just a little NE up in Chicago.   The answer to all your questions is yes, as long as the seller (and bank if in the picture) agree to the contract terms.

You can set up seller financing however you want actually which is why it is such a great creative strategy.  You can do seller financing with just the down payment and have traditional bank financing (more typical on commercial deals) the only speed bump is whether or not the BANK will allow it.  You can also set it up for interest only while you add value and then refinance.  Everything is negotiable. 


Yes I'm aware of seller financing and rent to own. I financed my first home with seller financing and had a great experience. Seller financing the downpayment would be considered a second mortgage and most traditional lenders will not allow that. They like to see the borrower make a contribution to the deal. Commercial lenders don't usually get involved in small deals. You could go private money but you will pay through the nose for fees etc. Traditional banks sell their loans on the secondary market therefore they underwrite to Fannie/freddie guidelines. You are talking about a 100% CLTV and many traditional lenders do not allow seller seconds.