Seller Financing

11 Replies

Hello All,

Last night I scoured BP and found so many different things on the Seller Financing process. That the awesome thing about BP, you get so many different persepctives! However, right now my head is spinning because Im trying to lock down somewhat of a standard way of doing things as it pertains to seller financing.

1. Has anyone adopted this sort of financing as their primary method of financing your real estate investments ?

2. Is there an actual step by step outline of the seller financing process somewhere ?

Thanks in advance for your help!

Josh

@Joshua White

There are many, many podcasts available with people who do seller financing for all their deals.

I'm not sure about a step by step guide, but every seller financed deal is a little different, because the seller and property are a little different (or a lot).

I think generally speaking you might imagine a process where:

  • You find a motivated seller who has a need that you can sate (this house is some kind of burden to me that I no longer want)
  • You explain to them the way that you can help them fill the need (seller financing, wheeee!)
  • You obtain the property from them

The issue with a step-by-step guide is that seller financing has so many flavors.  Sub-To, Land Contracts, Seller Held Mortgages, and Lease-To-Own come to mind right off the top of my head, and there are surely more.  Even just those fours options are so different ... it would almost be disrespectful to treat or approach each of them the same way.

Hi Joshua,

Seller Financing is driven now by The Dodd Frank Act, DFA and it's creation of the Consumer Finance Protection Buerau, CFPB to enforce the DFA. Imagine going down a seller financing road and you are the seller. You will come to your first fork in the road and you will need to decide if you are selling the home and seller financing to a consumer or investor. The DFA defines a consumer as an owner occupant personally and or family members. You can go to the CFPB web site consumerfinance.gov for the complete definition. The easiest way to answer this question is, is the buyer and investor to hold as a rental for income and investment. Anything else is going to be consumer. You need to have this answer in writing from the buyer at the inception of the negotiations so you have proof you are not violating the DFA. If you are selling to an investor you are free to make your deal subject to all the other guidelines of your state for loan brokerage, Etc. 

If you are going down the fork in the road that is the consumer you need to follow the DFA. There are some exemptions but the law forces you as the seller to hire a Mortgage Loan Originator MLO to underwrite the loan specifically for the borrowers ability to repay, ATR. Again this is a very simple answer and the CFPB web site is the best place to go for answers. 

Because it took 6 years to roll out the rules and guidelines of the DFA there is a lot of misinformation on the internet and BP. 

Terry Lewis 

Seller Finance Consultants, Inc

Hi Joshua,

Seller Financing is driven now by The Dodd Frank Act, DFA and it's creation of the Consumer Finance Protection Buerau, CFPB to enforce the DFA. Imagine going down a seller financing road and you are the seller. You will come to your first fork in the road and you will need to decide if you are selling the home and seller financing to a consumer or investor. The DFA defines a consumer as an owner occupant personally and or family members. You can go to the CFPB web site consumerfinance.gov for the complete definition. The easiest way to answer this question is, is the buyer and investor to hold as a rental for income and investment. Anything else is going to be consumer. You need to have this answer in writing from the buyer at the inception of the negotiations so you have proof you are not violating the DFA. If you are selling to an investor you are free to make your deal subject to all the other guidelines of your state for loan brokerage, Etc. 

If you are going down the fork in the road that is the consumer you need to follow the DFA. There are some exemptions but the law forces you as the seller to hire a Mortgage Loan Originator MLO to underwrite the loan specifically for the borrowers ability to repay, ATR. Again this is a very simple answer and the CFPB web site is the best place to go for answers. 

Because it took 6 years to roll out the rules and guidelines of the DFA there is a lot of misinformation on the internet and BP. 

Terry Lewis 

Seller

bureau

@Joshua White

You didn't make it clear, seller financing on you buying, the seller financing to you as an investor, non-occupant, or you seller financing to a buyer who will occupy.  All the difference in the world between these scenarios.

I suspect you are refering to sellers financing to you, an investor.   Rare these days in appreciating market and days on market being less than 60 in most areas.  Why would a seller need to finance if they can sell in 60 days?  Mainly because the house is over priced, has some huge defect that wouldn't go well via a listed sale.

There's other more viable creative financing means to control property than to comb for the needle in the haystack looking for sellers willing to finance.

But here's a good tip.  Use craigslist.org in your area.  Call ALL of the forsale by owner ads.  Those folks are decent candidates for seller financing or lease - option.   Probably 1 in a few hundred might be interested is my guessing at statistics.  But you'll gain alot of experience talking to sellers, this alone is worth making 200 calls.  (serious).

@Curt Smith

 My apologies! Youre absolutely right Curt. I was not clear. I am speaking about seller financing in terms of being the buyer.

Thats a great suggestion Curt. I've not yet gone the craigst list route yet!

@Terry Lewis

I will definitely check into the Dodd Frank Act !

If you're talking to a seller it should be a "cash or terms" conversation

Germans includes many things: subject to, lease options, wraparound mortgages, installment land contracts, installment sales on free and clear houses, joint ventures with sellers, private lenders, joint venture with credit partners, Hardmoney lenders, etc

If you're in Delaware which is a conservative state, I would first find a great contract attorney and the season 30 year vet realtor.

And consider being an agent.

@Joshua White

I'm surprised there isn't a How-To guide out there for walking through a seller finance offer. There are many nuances and steps that need to be handled carefully. Many would-be sellers are too frightened to attempt this kind of a deal. Many relatives and friends and even professionals caution them to avoid it. But, the reality is it can be great for both the seller and the buyer. A step-by-step guide on how to communicate with a potential seller would be invaluable here. The buyer needs to confidently follow a plan that is legal and legit! If anyone has knowledge of a best-in-class resource on this topic, pray tell!! I for one would be interested!!

Originally posted by @Terry Lewis :

Hi Joshua,

Seller Financing is driven now by The Dodd Frank Act, DFA and it's creation of the Consumer Finance Protection Buerau, CFPB to enforce the DFA. Imagine going down a seller financing road and you are the seller. You will come to your first fork in the road and you will need to decide if you are selling the home and seller financing to a consumer or investor. The DFA defines a consumer as an owner occupant personally and or family members. You can go to the CFPB web site consumerfinance.gov for the complete definition. The easiest way to answer this question is, is the buyer and investor to hold as a rental for income and investment. Anything else is going to be consumer. You need to have this answer in writing from the buyer at the inception of the negotiations so you have proof you are not violating the DFA. If you are selling to an investor you are free to make your deal subject to all the other guidelines of your state for loan brokerage, Etc. 

If you are going down the fork in the road that is the consumer you need to follow the DFA. There are some exemptions but the law forces you as the seller to hire a Mortgage Loan Originator MLO to underwrite the loan specifically for the borrowers ability to repay, ATR. Again this is a very simple answer and the CFPB web site is the best place to go for answers. 

Because it took 6 years to roll out the rules and guidelines of the DFA there is a lot of misinformation on the internet and BP. 

Terry Lewis 

Seller

Terry,

How is the seller taxed in the event that he is selling (via 100% seller financing) to an investor, but not receiving all the cash up front? Does the IRS consider this constructive receipt? or is the seller just taxed on what they receive from the "mortgage" payments?

Thanks

Greg

as far as I've learned, Dodd Frank only applies if you sell more then 3 house in one entity per year. so, if you take title in land trust that shouldn't be a problem.

Always check with your attorney

Good Luck

@Mike Krieg

"how to guide" to help a long time owner occupant sell their home on a note...  

Virtually every real estate Attorney/title office can close a sale on a mortgage and a note.  This is what banks do, shuffle off the sale and note closing to RE Attorneys.

Nothing is different for an owner occupant to sell on a note vs a bank lending a borrower the cash to buy a house.  Contact any closing office (Attorney vs Title office) ask if they can provide the mortgage and note documents, they will say yes, then have them edit in the terms you agreed to with the seller... No bid deal.