How to structure a seller financed deal?

Member since 2022 · 39 posts · 14 votes

I recently saw a property that is available to buy as a seller financed opportunity. I would love to hear from you folks here as to what I should look out for and any gotchas or any other resources you could point towards me.

Thanks.

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Eliott Elias

Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes

This is what i am shooting for

6% down

6% interest

5 Year balloon

Monthly payments: $500 less than rents coming in

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Charles Carillo
Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes
3y
@Sam Faas
I have found that advertised seller financing deals usually are overpriced or the terms are not favorable; i.e. high down payment, short term or high interest rate. You are most likely going to have the best luck of finding a good seller financing deal by searching out motivated sellers yourself, building rapport and then explaining seller financing. Possibly making 2 offers; one traditional offer and a higher, more favorable seller financing offer.
7 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
This is what i am shooting for
6% down
6% interest
5 Year balloon
Monthly payments: $500 less than rents coming in
10 Reply
Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
3y
@Sam Faas
Typically homes need major work and do not qualify for conventional financing
As noted they are typically overpriced. But if you go that way try and structure it for what works best for you.
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Sam Faas
OP
Member since 2022 · 39 posts · 14 votes
3y
Quote from @Chris Seveney:

@Sam Faas
Typically homes need major work and do not qualify for conventional financing
As noted they are typically overpriced. But if you go that way try and structure it for what works best for you.

Thanks for the reply!
This one does qualify for conventional financing but I suppose the only way to be absolutely sure would be to go through the conventional loan process. This house also had a recent price cut but to your point, it might very well still be overpriced.
0 Reply
Sam Faas
OP
Member since 2022 · 39 posts · 14 votes
3y
Quote from @Eliott Elias:

This is what i am shooting for
6% down
6% interest
5 Year balloon
Monthly payments: $500 less than rents coming in
Thanks for your reply!
This is incredibly helpful. What does the 5 year balloon mean?
This seller is offering 5% interest with 20% down and it is approximately $900 more in rents than the payment. Is there anything else I should ask for? Also what kind of origination fees/points would such a loan incur?
1 Reply
Sam Faas
OP
Member since 2022 · 39 posts · 14 votes
3y
Quote from @Charles Carillo:

@Sam Faas
I have found that advertised seller financing deals usually are overpriced or the terms are not favorable; i.e. high down payment, short term or high interest rate. You are most likely going to have the best luck of finding a good seller financing deal by searching out motivated sellers yourself, building rapport and then explaining seller financing. Possibly making 2 offers; one traditional offer and a higher, more favorable seller financing offer.

Thanks!
0 Reply
Eliott Elias
Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
3y
Quote from @Sam Faas:

Quote from @Eliott Elias:

This is what i am shooting for
6% down
6% interest
5 Year balloon
Monthly payments: $500 less than rents coming in
Thanks for your reply!
This is incredibly helpful. What does the 5 year balloon mean?
This seller is offering 5% interest with 20% down and it is approximately $900 more in rents than the payment. Is there anything else I should ask for? Also what kind of origination fees/points would such a loan incur?

The total loan is due in 5 years
2 Reply
Ben ScottPro Member
Property Manager · Oklahoma City, OK · Member since 2019 · 579 posts · 351 votes
3y
Make sure to close the transaction at a title company and have the deed and title put into your name. This protects you if the lender/seller passes away or would try to sell the property out from under you and your seller finance agreement. It's worth the $1k or so to take the correct measures. I've heard from several people who thought they had an owner finance agreement signed at the kitchen table, assumed they were paying down equity only to have the house sold right out from under them.
6 Reply
Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
3y
@Sam Faas
An owner financing agreement between buyer and seller should always be memorialized in a written document that includes the specifics of the deal. However, there are a few different ways to accomplish this, and the best option will depend on your specific needs and circumstances. Here are three main ways to structure a seller-financed deal:

1. Use a Promissory Note and Mortgage or Deed of Trust
If you’re familiar with traditional mortgages, this model will sound familiar. The buyer and seller agree to the terms of a promissory note that details terms like the loan amount, interest rate and amortization schedule. The mortgage is secured—or collateralized—by the house, the buyer’s name goes on the title and the mortgage is recorded with the local government.

2. Draft a Contract for Deed
Also known as an installment sale or land contract, a contract for deed is when a buyer does not receive the deed to owner-financed property until he makes the final loan payment. Alternatively, the buyer receives title if he refinances the loan with another lender and pays the seller in full.

3. Create a Lease-purchase Agreement
This option, also referred to as rent-to-own or a lease option, involves a seller leasing a property to a buyer who has the option to buy it for a set price. The buyer pays rent and, at the end of the lease term, can purchase the property or give up his lease option. If he opts to buy the property, rent paid during the lease period is applied toward the purchase price.

Because owner financing can be complex, we recommend working with a licensed attorney who will consider your best interests when drafting the necessary documents.

Good luck!
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6 Reply
John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
3y
Quote from @Ben Scott:

Make sure to close the transaction at a title company and have the deed and title put into your name. This protects you if the lender/seller passes away or would try to sell the property out from under you and your seller finance agreement. It's worth the $1k or so to take the correct measures. I've heard from several people who thought they had an owner finance agreement signed at the kitchen table, assumed they were paying down equity only to have the house sold right out from under them.
Ben, How common is this that a seller is willing to give up their deed upfront in exchange for seller financing. what if the buyer doesn't hold up their end of the bargain? How does the title transfer back to the seller in that scenario? I'd love to see a copy of a contract if anyone has one with this scenario.
2 Reply
Ben ScottPro Member
Property Manager · Oklahoma City, OK · Member since 2019 · 579 posts · 351 votes
3y
@John M. Think of the seller like a bank. When you purchase a home with bank financing, the bank doesn't hold the title. The buyer takes title in his/her name with a promissory note to the bank to pay the mortgage each month. Same principle with owner finance. If the buyer defaults, the lender (in this case being the seller) can foreclose and take back title. I'm an agent in Oklahoma and we have a Seller Finance addendum written up by the state real estate commission that functions just like an FHA or Conventional Loan addendum to a sales contract.
This is, of course, standard when you purchase a home with bank financing. But some buyers that use seller financing don't take the same steps (taking title in their name and closing at a title company) because they don't know any better.
As a landlord and property manager, I've taken numerous calls from people who needed a place to rent ASAP because their landlord sold the house they were in out from under them. All the while, that tenant thought they had a rent-to-own or seller finance deal set up.
1 Reply
Daniel Mach
Oklahoma City, OK · Member since 2018 · 1 post · 0 votes
3y
Quote from @Ben Scott:

@John M. Think of the seller like a bank. When you purchase a home with bank financing, the bank doesn't hold the title. The buyer takes title in his/her name with a promissory note to the bank to pay the mortgage each month. Same principle with owner finance. If the buyer defaults, the lender (in this case being the seller) can foreclose and take back title. I'm an agent in Oklahoma and we have a Seller Finance addendum written up by the state real estate commission that functions just like an FHA or Conventional Loan addendum to a sales contract.
This is, of course, standard when you purchase a home with bank financing. But some buyers that use seller financing don't take the same steps (taking title in their name and closing at a title company) because they don't know any better.
As a landlord and property manager, I've taken numerous calls from people who needed a place to rent ASAP because their landlord sold the house they were in out from under them. All the while, that tenant thought they had a rent-to-own or seller finance deal set up.
Hi Ben,
I am a real estate investor in Oklahoma and was looking to do seller financing using the OREC seller financing addendum. Do you happen to have an example of one that is filled out that I could take a look at? I would greatly appreciate it! Thank you!
0 Reply
Ben ScottPro Member
Property Manager · Oklahoma City, OK · Member since 2019 · 579 posts · 351 votes
3y
DM sent @Daniel Mach
1 Reply
Andrew Biagi
New to Real Estate · Tampa, FL · Member since 2017 · 5 posts · 2 votes
2y
Great Information exchange in this thread. Thank you,

@Ben Scott @John M. @Wale Lawal
1 Reply
Wale LawalBusiness Member
Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
2y
Quote from @Andrew Biagi:

Great Information exchange in this thread. Thank you,

@Ben Scott @John M. @Wale Lawal

Thank you @Andrew. Appreciate that alot.
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NETWORTH BUILDERS5236 Reviews
Website View Page
1 Reply
Mario A Casarez
Whittier, CA · Member since 2020 · 8 posts · 10 votes
2y
Quote from @Wale Lawal:

@Sam Faas
An owner financing agreement between buyer and seller should always be memorialized in a written document that includes the specifics of the deal. However, there are a few different ways to accomplish this, and the best option will depend on your specific needs and circumstances. Here are three main ways to structure a seller-financed deal:

1. Use a Promissory Note and Mortgage or Deed of Trust
If you’re familiar with traditional mortgages, this model will sound familiar. The buyer and seller agree to the terms of a promissory note that details terms like the loan amount, interest rate and amortization schedule. The mortgage is secured—or collateralized—by the house, the buyer’s name goes on the title and the mortgage is recorded with the local government.

2. Draft a Contract for Deed
Also known as an installment sale or land contract, a contract for deed is when a buyer does not receive the deed to owner-financed property until he makes the final loan payment. Alternatively, the buyer receives title if he refinances the loan with another lender and pays the seller in full.

3. Create a Lease-purchase Agreement
This option, also referred to as rent-to-own or a lease option, involves a seller leasing a property to a buyer who has the option to buy it for a set price. The buyer pays rent and, at the end of the lease term, can purchase the property or give up his lease option. If he opts to buy the property, rent paid during the lease period is applied toward the purchase price.

Because owner financing can be complex, we recommend working with a licensed attorney who will consider your best interests when drafting the necessary documents.

Good luck!

Hi Wale,
Who keeps the promissory note in your example #1 above, of using a Promissory Note and Mortgage or Deed of Trust? Or is it held by the title company?
0 Reply
Dawit Wo
Member since 2022 · 15 posts · 2 votes
2y
@Daniel Mach

@Ben Scott
Ben or Daniel,
Can either of you please send me a copy of the completed OREC seller financing addendum?
0 Reply
Ben ScottPro Member
Property Manager · Oklahoma City, OK · Member since 2019 · 579 posts · 351 votes
2y
There is one available on the OREC website. Or DM me your email address and I can send you one.
1 Reply
Dawit Wo
Member since 2022 · 15 posts · 2 votes
2y
Quote from @Ben Scott:

There is one available on the OREC website. Or DM me your email address and I can send you one.

DM sent. Thanks!
0 Reply
Alex Fernandez
Investor · Dallas - Fort Worth · Member since 2023 · 1 post · 0 votes
2y
Great information, Thank you!
0 Reply

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