How do I Explain Seller Financing?...

8 Replies

So, I have a home owner that has 100% equity in a non-occupied home. He is not motivated to sell, but it seems he could be persuaded to go with seller financing...so, do I explain:

I will take possession of the property by transferring the title into my name.

You will retain ultimate ownership of the property and have the ability to foreclose should there be any non-payment issues.

I will pay you a monthly loan payment of X Dollars every month for the next X Years.

And if this is correct so far, how do I explain the terms?

And what happens at the end of the loan period? Do I actually own the property at that point...

Brandon Sturgill, Real Estate Agent in OH (#2015001666)
9379797000

First, if he's holding the note, he doesn't retain ownership in the property.  He is a lien-holder, which gives him certain rights under certain conditions -- like being able to foreclose if you don't pay your monthly payments.

The best way I've found to explain seller financing to a seller is to ask if they've ever purchased a house with a bank loan.  Assuming they say yes, I tell them to imagine that they are the bank in the transaction, not the homeowner.  The only difference is that instead of handing over a bunch of money for the loan, they simply "pledge" the money they have in the property for some period of time (so they don't think they have to come out of pocket with additional cash).  

I then let them ask questions and clarify the stuff that's still not clear. This is typically around the payoff (is it an amortized loan or a balloon?) and recourse if I don't pay (I explain how a foreclosure works and how a low LTV protects them).

I'd just like to add that you may want to see what the seller wants, whether he's looking for steady income for a long time or he wants the money back in a certain time frame. I do find that typically tired landlords prefer a steady income and would set a prepayment penalty to ensure that they will still continue to get that income every month.

@J Scott Much appreciated. So, do you have a "formula" for the payment and terms...this is a $110k home (ARV) that will bring $1k a month after a $8-10k rehab... (yet another twist)...

So, the lower the monthly payment the seller will accept, the better for my profit margin. And should I out-of-pocket the rehab and focus on returns in the long-run?

Brandon Sturgill, Real Estate Agent in OH (#2015001666)
9379797000

@Leon Yang   This is a home that sits directly across the street from me that has been empty for about three years...owner had a heart attack while mowing the grass and moved into a condo...

I think the income on a monthly basis is key...and if I were him, I would want a balloon at some point in the next 10-15yrs...any suggestions?

Brandon Sturgill, Real Estate Agent in OH (#2015001666)
9379797000
Originally posted by @Brandon Sturgill:

@J Scott Much appreciated. So, do you have a "formula" for the payment and terms...this is a $110k home (ARV) that will bring $1k a month after a $8-10k rehab... (yet another twist)...

 I'm not the best person to answer this question.  When I do seller financing, it's typically for rehab/flips, and my goal is just being out of pocket as little as possible for the few months I'm going to hold the property.  So, monthly payments don't really matter to me, as I'm only making a couple of them, and I'm generally okay with low LTVs, as I have the cash if I need it.

Sounds like your situation is very different, so I'll let someone else suggest terms...

Hi... see www.r2ownsolution.com

Matt

I agree. The lower the payment the better the deal. I would just do the simple math. If you purchase it for $110,000 and he wants 10%, that's just over $900 a month payment if it's interest only. Not much of a margin.  However, if he will settle for 5% then you have a much better deal. The best thing to do is just ask. But if he is not motivated then chances might not be too good. 

So the actual deal is that you are buying the property with nothing down. He is holding the note at x%. You are making monthly payments to him. You could setup a term that is agreeable to both you and the seller 1, 3, 5, 10 years. He may want you to replace him as the lender as soon as possible though. So it all depends on what he wants.