Seller financing is a creative financing method that can be used to buy a property. With seller financing, the person selling the house also acts as the lender. Instead of the buyer getting a mortgage loan from a bank or a credit union, the buyer pays the seller with monthly payments over a period of time, just like making payments on a loan.
The buyer typically makes regular monthly payments to the seller, including interest, over a set period of time until the loan is fully paid off. This allows the buyer to make the purchase without having to come up with all the money upfront and can also benefit the seller by potentially attracting more buyers who may not be able to obtain financing from a bank.
Seller financing is a good way for a seller of a property to attract non traditional buyers. Seller financing appeals to buyers that are not able to get a mortgage loan from the bank. Seller financing is also appealing to real estate investors because they are not required to be approved for a loan prior to agreeing to purchase the property.
Seller financing involves a contract between the buyer and the seller outlining the terms of the loan, including the interest rate, length of the loan, and monthly payment schedule, as well as any consequences for late payments or defaulting on the loan. A mortgage and promissory note are typically used to secure the seller’s interest in the property.
Here’s how it works:
Let’s say you are an investor who wants to buy a house from a seller for $200,000. Your goal is to own this as a rental property long term. You only have $20,000 for a down payment but you can afford to make monthly payments. Instead of going to a bank to get a loan, you talk to the seller and ask if they would be willing to finance the sale and give you seller financing.
If the seller agrees, you would make a down payment of $20,000 and then make monthly payments to the seller for the remaining $180,000. The seller would act as the lender and charge you interest on the loan, just like a bank would. The terms of the loan would be decided between you and the lender. All of the terms are negotiable between you and the seller. You can negotiate the down payment, the loan term and the interest rate.
Being creative with the terms is where real estate investors can use this method to their advantage. If you can get the seller to agree to an interest rate that is lower than the prevailing interest rates on a conventional mortgage then this can be very favorable to you as an investor because you will not have to pay to refinance the property, and you will also not have to pay any loan origination fees or points for the loan.
Example:
Purchase Price $200,000
Down Payment $20,000
Loan Amount $180,000
You offer the seller $200,000 to purchase their house with $20,000 down and a 30 Year Fixed Rate Mortgage at 3% Interest (which is a monthly payment of $759). Let’s say they turn this offer down because they don’t want to wait 30 years and they want more monthly income.
So you offer them a 15 year fixed rate mortgage at 2.75% with a monthly payment of $1,222 to which they agree. Now all you need to do is pay them $1,222 per month and after 15 years the house is yours and you own it free and clear. If you can rent the house for a higher amount (say $1,800) then you will use the tenants’ rent to pay the monthly interest payments.
In some extreme cases you can get the seller to agree to no interest rate at all. Using this same house as an example, let’s say that the seller wanted more than $1,222 per month and did not want to wait 15 years. You could use this to your advantage and offer them $1,800 a month for 100 months. If the seller agrees then all you would need to do is make 100 monthly payments of $1,800 and you would own the house free and clear. In this scenario, the interest rate on your loan is zero and you are simply paying off the loan balance every month.
Why would a seller go for this option? Because they need to sell and they are not willing to reduce their price. With this strategy you could own the house free and clear in a little over 8 years.
When I make a cash offer to purchase a property from a seller I always start out with a low cash offer. For example, on this property I may offer $140,00 cash. When that is rejected, I follow up with a higher seller financing offer. Then I negotiate the terms of that offer.
Seller financing can make sense for older sellers who are retiring and who want to earn some extra income. If you employ this strategy, It’s a good idea to have the closing at an attorney’s office and to make sure that the seller understands the terms of the seller financing agreement.
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