Tutor me please! Can't grasp Seller Financing

9 Replies

Hello experts!  I have been spending several months reading up on investing and need some clarification on a sticking point.  Due to our financials, my husband feels that seller financing will be one of our better options to begin our real estate investing.  However, I can not seem to wrap my head around how this would work.  I think I get hung up on how to offer a deal that is palatable to a seller ... and then also how it is ok to turn around and rent the property out to a tenant.  Since I am having trouble grasping this 'theory', I also have no idea of the legalities involved.  If anyone can help simplify this for me, so maybe it will click in my brain ... I appreciate it!!  Thank you!  :-) 

Hi @Amy Brocious . Your best candidates for seller financing are existing landlords / absentee owners.  They understand better how it works and are more ok with headache-free cashflow, being the 'bank'.  Joe and Jill homeowner are tough to convince.  They want to get cashed out, move and buy again.  They will waste almost all of your time with this strategy.  You need off-market absentee owners or sudden transferees.  Probates I have found don't work well either.  Too many heirs to come to a consensus and they all want their money now.

The actual methods of seller financing are basically lease to own (where you just have an option to buy, then sublease) and a note and deed of trust (here)/ mortgage.  DO NOT DO A LAND CONTRACT.  You will not have title to the property until you pay it off.  I can ping an expert or 2 if you like, but those are the basics.  Hope this helps!  (Not intended to be legal advice.  Consult counsel before you sign stuff!)

@Steve Vaughan - thanks so much for the input!  That is starting to make more sense!!  :-) 

@Amy Brocious

Amy - I've done a few seller finance deals (on the buy) side so you can check my previous posts if you want to read up.  I always do an actual purchase so I get the title to the property and make payments to the seller (instead of a bank).  

Personally I had the best success with properties that needed rehab, so they weren't moving with a standard sale because conventional lenders wouldn't finance it.  That would knock out most of the buying competition.  Then use my own funds to rehab and rent it out.  Usually after a year or two of steady rentals, go to the bank and refinance, and pay off the original seller, as they typically want a 5 or 7 year balloon.

The key points in my other posts: get it appraised so you're not overpaying, and use a good attorney that understands seller financing.  Especially with all the recent laws and regulations around it.

Good luck!

- Tom

@Amy Brocious

A recent home(rental) we purchased:

An individual came to me wanting to sell me his house. I told him that I would love to, but was a little short on cash. I told him I could do 20% down and pay the balance on a 5 year amortization. He said that would be great, that he would get some cash and also a monthly check.

We made a note, he deeded the house to me, he filed a mortgage. 

I have it rented out.

Simple

Also when we bought a 32 unit apartment:

We had 10% down, the seller financed 20%, and the bank financed 70%.

Everyone happy.  

From what I know about Seller financing, it is a great option if you have the larger down payment that I feel most ask for or require. Then you have to be able to follow it up with a balloon payment with 7 years even though the monthly payment will be amortized over a longer period.

Good Luck!

Originally posted by @Amy Brocious :

Hello experts!  I have been spending several months reading up on investing and need some clarification on a sticking point.  Due to our financials, my husband feels that seller financing will be one of our better options to begin our real estate investing.  However, I can not seem to wrap my head around how this would work.  I think I get hung up on how to offer a deal that is palatable to a seller ... and then also how it is ok to turn around and rent the property out to a tenant.  Since I am having trouble grasping this 'theory', I also have no idea of the legalities involved.  If anyone can help simplify this for me, so maybe it will click in my brain ... I appreciate it!!  Thank you!  :-) 

 Hello Amy,

This is a really good approach to investing in the industry. Also, do you due diligence before jumping into it. Make sure you have a good lawyer and a stable financial foundation.

@Amy Brocious my last two purchases were using seller financing. I also use private lenders to purchase property.

Seller financing works best when the seller owns outright with no mortgage. If they have a mortgage with equity you can sometimes do partial 2nd liens from the seller but we will keep it simple and say that they own it outright. 

Seller financing is basically the seller acting as the bank. You have a lawyer or title company draft the note and mortgage. These deals are much easier because you are not dealing with banks and their BS.

These deals can be structured many different ways. One of my deals I was able to negotiate 6% interest with 30 year amortization with a ballon(balance of the loan) due in 15 years. My last deal(which I have a diary thread on BP) was negotiated at 0% for two years. It's all about finiding and negotiating a win-win for each party. There are tax advantages for the seller holding a note on a property that has appreciated over time. You need to find the sellers motivation and see how you can make a deal work. Also, if it's a strong cash flow property you can borrow the down payment and some rehab cost as well(maybe a family member). It's a simple concept but hard to make work in the real world. PM me if you have any questions.   

Thank you so much for the responses ... I will definitely be following up with you as I work this through!  

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