Seller Finance Servicing Benifits for Seller

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Seller Finance Servicing Benifits for Seller

Ikenna Okoye
Investor · Houston · Member since 2019 · 74 posts · 11 votes

Hi all,

I'm looking at a lead in the Ft. Worth area in Texas for a few seller-finance properties. I've offered the owner his price, a decent interest rate, and a 5+ year ballon on the note. Since I'm newer, I don't have the 20% down that the seller wants for the properties. His main concern with having no "skin in the game" is if I fail to perform and don't pay him for up to 6 months before a hypothetical foreclosure or him taking the property back. 


One option I know of that could help alleviate some of his concerns would be a servicing company that collects payments, but I'm unsure if this is usually used for seller finance transactions at all or if it's only Subject-to deals. My question is, what are some benefits that I can present to him, if any, that can ensure his confidence in me as a buyer as far as making payments? Can servicing companies provide a kind of insurance, can they enforce payments somehow? Any insight would be helpful, thanks!

Ikenna

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Shiela R.
Investor · Boulder, CO · Member since 2017 · 304 posts · 347 votes
3y

Hi @Bruce Lynn.  A lot of good info here.  All due diligence still applies.

One way to ease a seller's mind about skin in the game is "deed in lieu".  Since the seller is the lender, sign a document that transfers the title of the property from you to the seller/lender. Then they won't have to foreclose if you stop payment but rather can take back the deed and ownership to the real property.

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  • Alecia Bolton
    Investor · Seatac, WA · Member since 2017 · 134 posts · 121 votes
    3y

    A servicing company will take the payments from you and give them to the lender, as well as manage the end of year paperwork (1099 forms).  There is a fee for this.

    They won't enforce payments, but they will follow up with you to try to get you to reperform.  

    And yes, servicers do seller finance transactions.  If he decided to sell the loan, having a servicer will get him better pricing.  There's also a market for him to sell the loan if you default, which might give him some piece of mind that he wouldn't have to go through the foreclosure to recoup his investment.

    You could also find another investor to in with you to get to the 20%.  

    3Reply
  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    3y

    @Ikenna Okoye   Almost every seller finance deal I see wants you to have skin in the game.....10-20%.   My guess is if you can find 100% it is not a deal...either the properties are way over priced, the interest rate super high or something.

    Almost every one I see uses a servicer, so that is not unusual at all.  It's preferred, but does not reduce risk for the seller.   Just makes things perhaps easier for both of you.

    I think you want skin in the game....you want reserves for when things go wrong...ACs go out, roofs need replaced, tenants destroy the property and you have a big rehab bill and a 2-3-4 month vacancy to contend with.....

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  • Ikenna Okoye
    OP
    Investor · Houston · Member since 2019 · 74 posts · 11 votes
    3y

    @Alecia Bolton This makes and is very helpful. I am definitely looking to bring a partner or two in if possible, I just wanted to reduce the cash I would have to put into the deal either way, thank you. 

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  • Ikenna Okoye
    OP
    Investor · Houston · Member since 2019 · 74 posts · 11 votes
    3y

    @Bruce Lynn This makes sense, lower down payments to make the deal more enticing probably for an aged property with little updates and deferred maintenance. I'll keep having reserves in mind, I know that's important, so thanks for that reminder. Sometimes it's easy to look at the front end of the deal and get into the wishful thinking mindset on the backend/management. 

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  • Shiela R.
    Investor · Boulder, CO · Member since 2017 · 304 posts · 347 votes
    3y

    Hi @Bruce Lynn.  A lot of good info here.  All due diligence still applies.

    One way to ease a seller's mind about skin in the game is "deed in lieu".  Since the seller is the lender, sign a document that transfers the title of the property from you to the seller/lender. Then they won't have to foreclose if you stop payment but rather can take back the deed and ownership to the real property.

    3Reply
  • Wale LawalBusiness Member
    Real Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
    3y

    @Ikenna Okoye

    Seller financing may prove a good option for those wishing to lend money. Select upsides associated with providing it include:

    • Ability to save on closing costs
    • Can produce significant capital gains tax savings over time
    • Faster time to sale, and ability to sell your property as-is without the need for repairs
    • Released from property tax, homeowners insurance and various maintenance expenses
    • Option to sell the promissory note to an investor

    Good luck!

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y

    @Ikenna Okoye

    You should always use a servicer for your loans. You can write into the agreement that it is paid by the borrower, so in some instances it won’t cost you a penny to stay compliant.

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  • Kevin Crowell
    Real Estate Professional · Mansfield, MA · Member since 2012 · 74 posts · 28 votes
    3y

    Good Morning Ikenna -

    I would definitely add a servicer as your list of vendors regardless whether it is an institutional or a seller finance loan. You can be sure you know your accounts are accurate whereas when they are self-serviced, you can't be sure. You need this at tax time and when you are selling to an investor. 

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