Seller finance / contract for deed
Member since 2022 · 74 posts · 45 votes
Seller finance / contract for deed
11 Replies
- 1moMatthew Irish-JonesBusiness MemberReal Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
Tough to do if you have debt in the property, most lenders have a due on sale clause.
Are you talking about seller financing after they are paid off or using some kind of subject to or wrap around financing?
Irish Jones Realty4.947 Reviews - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1mo
Why would you do seller financing ? Th ATS the first question I ask people. If the property is in need of work and doesn't qualify for traditional financing then that's a reason - but seller financing and being a lender to a borrower with most likely poor credit many times does not end well.
7e investments53 Reviews- Member since 2022 · 74 posts · 45 votes1moThere are people who have no credit because of their line of work or immigration status. It’s not the same as having no credit. It comes down to vetting the buyer no different than vetting a tenant.
Quote from @Chris Seveney:
Why would you do seller financing ? Th ATS the first question I ask people. If the property is in need of work and doesn't qualify for traditional financing then that's a reason - but seller financing and being a lender to a borrower with most likely poor credit many times does not end well.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1mo
@John Salcedo - why is that better than getting all the cash at sale and lowering risk of default ?
7e investments53 Reviews - Member since 2022 · 74 posts · 45 votes1moI wasn’t implying one was better than the other nor comparing it to other strategies. I think having a diverse portfolio and understanding different strategies gives investors an advantage.
Quote from @Chris Seveney:
@John Salcedo - why is that better than getting all the cash at sale and lowering risk of default ?
- 1moDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @John Salcedo:
There are people who have no credit because of their line of work or immigration status. It’s not the same as having no credit. It comes down to vetting the buyer no different than vetting a tenant.Quote from @Chris Seveney:
Why would you do seller financing ? Th ATS the first question I ask people. If the property is in need of work and doesn't qualify for traditional financing then that's a reason - but seller financing and being a lender to a borrower with most likely poor credit many times does not end well.
>It comes down to vetting the buyer no different than vetting a tenant.
The credit card companies have a lot of data that gets different weights to determine the credit score. The credit score reflects the default risk.
Why would you think you can do a better job determining the default risk that the credit rating companies?
good luck (i fear you are going to need it)
- Investor · Austin TX · Member since 2016 · 1k+ posts · 2k+ votes1mo
Quote from @John Salcedo:
I’m interested in implementing this strategy as an exit for new properties I pick up. Has anyone had luck seller financing? In what markets and price points?
I think it depends on the asset type. Owner finance works very well with mobile homes and land. Cheap to buy, inexpensive to repair (mobiles) and then owner finance with an interest rate that makes your note an asset you can sell if you want the cash or hold in an IRA. Signle family homes can be trickier. If you have financing then you risk the due on sale clause. I've heard there are DSCR lenders that will allow you to wrap but I've never actually spoken to one that said they would so this could just be a rumor. It can be done, I know plenty of people who have done it and have done it myself. I've both purchased and sold with owner finance, it makes sense for specific situations. It's a good strategy to have in your toolbox.
- Member since 2022 · 74 posts · 45 votes1moThanks for your input. Can you provide information on where you learned to sell single family homes through seller finance?
Quote from @Lydia R.:
Quote from @John Salcedo:
I’m interested in implementing this strategy as an exit for new properties I pick up. Has anyone had luck seller financing? In what markets and price points?
I think it depends on the asset type. Owner finance works very well with mobile homes and land. Cheap to buy, inexpensive to repair (mobiles) and then owner finance with an interest rate that makes your note an asset you can sell if you want the cash or hold in an IRA. Signle family homes can be trickier. If you have financing then you risk the due on sale clause. I've heard there are DSCR lenders that will allow you to wrap but I've never actually spoken to one that said they would so this could just be a rumor. It can be done, I know plenty of people who have done it and have done it myself. I've both purchased and sold with owner finance, it makes sense for specific situations. It's a good strategy to have in your toolbox.
- Investor · Austin TX · Member since 2016 · 1k+ posts · 2k+ votes1mo
Quote from @John Salcedo:
Thanks for your input. Can you provide information on where you learned to sell single family homes through seller finance?Quote from @Lydia R.:
Quote from @John Salcedo:
I’m interested in implementing this strategy as an exit for new properties I pick up. Has anyone had luck seller financing? In what markets and price points?
I think it depends on the asset type. Owner finance works very well with mobile homes and land. Cheap to buy, inexpensive to repair (mobiles) and then owner finance with an interest rate that makes your note an asset you can sell if you want the cash or hold in an IRA. Signle family homes can be trickier. If you have financing then you risk the due on sale clause. I've heard there are DSCR lenders that will allow you to wrap but I've never actually spoken to one that said they would so this could just be a rumor. It can be done, I know plenty of people who have done it and have done it myself. I've both purchased and sold with owner finance, it makes sense for specific situations. It's a good strategy to have in your toolbox.
You're welcome John. To be honest, I learned from an investor I met who had converted all 15 of his rental properties into owner financed properties. I asked a lot of questions and wholesaled him a handful of deals he added to his portfolio. The model fit what he was looking for. He kept most of them in his IRA and he was able to have cash flow without tenant headaches. Once I understood how it worked, I realized that it made sense in the right situations.
- 1moAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
John, seller financing can be a strong exit when the property is marketable but the buyer has trouble qualifying for conventional financing, or when you value monthly income more than receiving all the cash at closing.
I’d focus less on a specific market or price point and more on the buyer quality and deal structure. I’d want a meaningful down payment, verified income/assets, a rate and term that compensate you for the risk, clear default remedies, and an attorney-drafted note/security instrument. With a contract for deed especially, state law matters, so I would not use a generic template.
There’s also an important tax angle. A qualifying seller-financed sale may be treated as an installment sale, allowing part of the gain to be recognized as principal payments are received rather than all at once. But there are exceptions. For example, real estate held primarily for sale to customers in the ordinary course of a business generally does not qualify for installment-sale treatment.
If these are active flips, I’d also evaluate whether the operating business should be structured with an S-Corp as profits become consistent. If the property was previously held as a rental, remember that depreciation and any prior cost-seg deductions can affect the tax result when you sell, and depreciation recapture generally has to be recognized in the year of sale rather than deferred through the installment method.
Done correctly, seller financing can create a good exit and an income stream. I’d just underwrite the buyer almost as carefully as you underwrote the property.
Happy to connect!
INVESTOR FRIENDLY CPA®5241 Reviews - 1moDon KonipolBusiness MemberInvestor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
Quote from @John Salcedo:
I’m interested in implementing this strategy as an exit for new properties I pick up. Has anyone had luck seller financing? In what markets and price points?
I have utilized seller financing from both a selling point and a buying point, but since I deal mostly in commercial properties there may not be as a direct connection; IF you are referring to SFR rather than commercial or investment properties.
In a nutshell, as a seller providing financing to the buyer will expand the pool of buyers beyond buyers who qualify for loans and buyers who are paying cash. By expanding the pool of buyers, (and owner financing, with a reasonable down payment (20%) expands the pool significantly; low down payment (5 - 10%) expands the pool exponentially), the seller will obtain a higher price, possibly higher interest earnings than comparable investments, and be able to sell properties that won’t qualify for institutional financing.
The ability to sell the property when you keep the existing note in place (wrap) can result in significant income being generated on the interest rate differential. We sold a property for $1,725,000 with a $1,400,000 seller carryback note at 10% interest. There was a $675,000 underlying note carrying a 4% rate. So we earned 10% on our $725,000 equity we financed and the difference between 10% and 4% on the $675,000 underlying note, or an additional $40,000 per year. In this specific case we had at agreement with the note holder (local bank) to allow a one time wrap. We could have done it without their agreement but the result would have been a violation of the loan covenants - specifically due on sale.
For a number of reasons I think that seller financing works better for the seller of commercial or investment real estate than it does for residential. The buyer pool of non qualifying home buyers who are good risk seems relatively small, while the pool of good risk commercial buyers who don’t qualify seems much larger.
On the buy side my favorite interest rate is 0, with fully paid off loan in 7 years, and cash flow from the property at least covering the note payments. Like my dad used to say about the union “no show” jobs; nice work if you can get it.
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