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Sell your house, get monthly cash flow at higher rates than a Bank while still owning the property! No headaches maintaining the property either… What 😵?! Yes, it’s called “Seller Financing” 🤗.
What Is Seller Financing?
Well it’s kind of owning a Bank, a mortgage lending business and a cash flowing portfolio with no property management hassle all at once! 💰💰💰 Instead of applying for a conventional bank mortgage, the buyer signs a mortgage with the seller:
Simply put it means the owner puts up the money required to buy a property. In other words, instead of taking out a mortgage with a commercial lender, the buyer is borrowing the money from the seller. But wait what 😳??? Why would a Seller put up the money?
What’s In It For You, The Investor?
Lease Buy Option or Seller Financing grows when the markets are over the top peak going into recession and early stages of recovery when banks are very much reluctant to lend money to anyone. When the overall credit market is tight, Seller Financing can make it possible for a lot of people to still buy a home and thus for you as an investor to easily sell or lease your property because of the presumed ownership!
To best understand and capitalize the different real estate markets & the strategies to deploy we urge you to make a deep dive into our market cycles series:
Let’s Break It Down, Money Talks! 💰
In most cases Seller Financing comes with a down payment, loan periods (amortization periods) shorter than the typical 30 years and balloon payments at the end.
Downpayment; To the seller, a down payment is the buyer’s “skin in the game”; it’s what a buyer stands to lose if defaults occur. Sellers will probably ask around 5% – 25% for down payments. While a seller may ask for a down payment, there’s often room for negotiation.
Loan; expect the loan to be around the 15 to 20-year range.
Balloon Payment with a balloon payment the entire remaining balance is due in full at some period of time at the end of the agreed loan period.
A financed scenario involving a down payment of 10%, a 30-year amortization period, but a balloon for the remaining balance due in year 15:
You see almost a doubling ($191.563) of the initial capital in 15 years. Receiving monthly cash flow, a down payment as initial security and retaining ownership if buyer defaults or balloon payment can’t be met. It’s a very lucrative selling option. The promissory note can be sold in the meantime to another investor if you might need the cash or the property can be sold at a future appreciated market price point if a default occurs.
Advantages of Seller Financing
Buyers approaching seller financing do so because of difficulties getting a conventional loan (poor / no credit). Seller financing typically skips closing costs with no appraisals. Sellers are often more flexible than a bank in the terms and much faster (processed within days).
For sellers, it’s easier to sell a house when credit is tight. Moreover, sellers can expect to get a premium for offering to finance, meaning they are more likely to get their asking price in a buyer’s market.
Seller Advantages
Property sells faster
Higher price (even in buyers market)
Monthly interest income
Regains property ownership (if buyer defaults or no balloon payment)
As the seller, you can, at any point, sell the promissory note to an investor or lender, to whom the buyer then sends the payments
Sell at future market appreciation
Buyer Advantages
Easy qualification
Negotiate rate and terms
Lower / No closing costs
Fast Closing
Disadvantages of Seller Financing
Buyers face higher interest than a market-rate mortgage from a bank. Long-term, the higher seller-offered interest could wipe out the savings gained from avoiding closing costs. Other charges to pay include survey fees, document stamps and taxes.
Sellers face the risk of borrower default. If the buyer stops paying, the seller could incur hefty legal fees as well.
It is very prudent that both sides consult real estate attorneys for the paperwork to close the deal and make sure both sides are protected equally.
Seller Disadvantages
Risks payment defaults
Risks foreclosure
Loan Administration
The Dodd Frank Act of 2010 placed limits on max 3 owner carried mortgages and a required mortgage originator’s license (wikipedia or investopedia)
Buyer Disadvantages
Flexibility comes at a price tag (higher rates)
Difficulty if there are underlying mortgages
No selling the property for capital gains or to get out of mortgage payments
Balloon payments require a separate loan at the end
Seller Financing In Four Easy Steps
Seller financing is a simple concept to understand but can be complicated to set up. It’s a good idea to hire a real estate attorney to structure the deal, a tax professional to help ensure you set up the deal advantageously to you as an investor and a loan collection service for the amortization and payment collection.
Write a promissory note; A promissory note is a legal document, like a lease, and is used in place of a mortgage loan. The promise part of the promissory note is the buyer’s promise to pay you for the house. All the details of the deal will be listed in the promissory note, such as repayment amount, interest rate, terms, consequences of nonpayment and how much of a down payment you require. Seller and buyer both sign the note. Your home acts as collateral on the promissory note. If your buyer defaults on payments, the deal is off and you keep the house.
Take a down payment; It’s common to do a seller-financing deal with a 5-25% down payment (Avg. 10%). The buyer is less likely to walk away or you get to keep the down payment.
Agree on the interest; As a lender you collect some interest on your loan around 7% -10%. Shoot for slightly above the conventional market & comparable to hard money lenders without risking being marked as a loan shark.
Loan / balloon payment; You may be acting like a bank but avoid long term waiting by amortizing the loan as a 30-year loan so your buyer can afford the monthly payments but structure the loan so the balance is due in a short time. A standard time frame for this is five years. Giving your buyer enough time to built up their credit to get a traditional loan from the bank.
Optional: You can always sell your promissory note earlier to an investor if you want cash fast (caution: might take a discount price to sell note.). Read more in “Make money by taking notes”!
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Bottom Line
Seller Financing is easy with a house you own free and clear. If you have a mortgage yourself you’ll need permission from your own lender to do the deal. When you consider seller-financing arrangements you would be owning a Bank, a mortgage lending business and a cash flowing portfolio with no property management hassle all at once!
It can be a way to jumpstart your investment venture by using your house as a collateral (more tips on this: 3 Ways Big Money Is Stashed In Your Home!) or a way to grow your money by dipping your toes into banking/money lending or simply a great strategy to add to your real estate portfolio asset planning. Whatever you choose, start to make, keep & grow your money today 🧐💰!
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