Using seller financing for real estate deals isn’t a concept many investors are overly familiar with, but rather one that a lot of our counterparts could stand to learn more about. Quite frankly, many of the professionals in our industry have heard about seller financing, but a much smaller contingent is actually taking advantage of it. That said, more investors could stand to benefit from this particular financing strategy. To this day, seller financing for real estate deals remains one of the easiest and most cost-effective strategies for savvy investors to implement. But what exactly is seller financing? Better yet, why would today’s investors want to consider seller financing over traditional options like banks and hard money lenders?
As its name suggests, seller financing — otherwise known as owner financing — will have investors finance their property through the person they are buying it from instead of a traditional bank or lender. In other words, seller financing for real estate will have the owner of a property in question act as the lender — it’s as simple as that. Investors looking to acquire a property will make monthly payments to the owner of the home they intend to purchase it from.
Seller financing works exactly like a bank loan, only the underwriting wasn’t written by a bank; it was drafted by the owner of the property — cost, down payment, interest and all. When all is said and done, however, it’s another way to fund your next deal, which begs the question: What makes seller financing a viable option for today’s real estate investors? Why would someone want to go this route, instead of with more familiar options?
Again, seller financing has become synonymous with today’s easiest and most cost-effective ways to finance an investment property, even if you have the capacity to deal with a traditional lending institution. You would be hard pressed to find a financing option that offers more potential than seller financing, but I digress. The benefits of seller financing for real estate are not without a significant caveat: the owner of the home in question needs to own it free and clear — that means no mortgage and remaining in a 100 percent equity position. There’s no other way around it; the owner you are looking to buy from needs to have paid off their mortgage in full. So, while seller financing may be a great option, your chances are inevitably limited.
If you can’t find a viable flipping candidate that is owned free and clear, there’s always “subject to” financing, but that’s a topic for another day. For now, I’ll focus on owner financing and how it can benefit those that seek its help.
Who knows, you may find seller financing for real estate deals to be one of your best options for a number of reasons, not the least of which are outlined below:
Ease Of Financing
As I already alluded to before, seller financing is a lot easier to receive than a traditional bank loan. Most notably, seller financing skips the middleman (the bank) altogether. Void of traditional lender involvement, deals founded on seller financing won’t be held hostage by all of the underwriting and “hoops” to jump through that typically accompany traditional bank loans. Whereas a traditional loan will have certain criteria — credit scores, debt-to-income ratios and a number of other fundamental indicators — owner financed deals have the potential to be a lot more forgiving and lenient. While homeowners aren’t likely to be too compassionate about their borrower’s past, they should be a lot easier to secure financing from than their institutionalized counterparts. More often than not, it’s said criteria that can mean the difference between a deal and no deal. So if you aren’t allowed to borrow any more money from the bank because of an existing mortgage or anything of that nature, seller financing will make the process a lot easier.
Zero Money Down Is Possible
Again, owner financing won’t have borrowers jump through nearly as many hoops as a bank will. Instead, the terms of the loan are contingent on the owner, and nobody else. That said, there may be some wiggle room, as nothing is written in stone at the onset of seller financing talks. If that’s the case, it stands to reason that borrowers may be able to have some input of their own. It’s entirely possible to request zero money down at the time of the purchase, for example. And while the owner doesn’t need to agree to the idea, it’s nice to know that things are negotiable.
Due to cutting out the middle-man and dealing directly with the seller, the rules of your impending mortgage are — more or less — ambiguous. After all, it’s not like you are dealing with Fannie Mae or Freddie Mac, each of whom require a big down payment upfront. It’s worth noting, however, that the subjective guidelines you have to work within are a double-edged sword. While it’s true you could negotiate a zero down payment option, they may laugh and charge you 50 percent down. So before you go in without a plan, be sure to exercise some tact. Your fate is in their hands.
Options For Creative & Favorable Terms
Since seller financing foregoes the banks altogether, it’s safe to assume that homeowners aren’t constrained by arbitrary regulations; they are not obligated to adhere to the same rules as their bank counterparts. As such, homeowners are free to draft their own set of rules, which can benefit investors immensely. Since there are no strict guidelines to follow, borrowers may be able to request some or all of the following:
No credit checks
Small down payment
No down payment
Below-market interest rates
At the very least, seller financing allows both parties to get creative. To see to it that both parties are happy at the end of a deal, just about everything is negotiable: Rates, terms, price, dates, and anything else you can think of. Therein lies the true benefit of seller financing: the flexibility of terms can very easily turn a mediocre idea into a great one.
Any Property Is For Sale
Traditional financing is great for anyone looking to buy a home; it’s got great interest rates (comparatively) for anyone willing to shop around. However, even traditional financing has its limits. You see, banks won’t simply loan money to anyone for anything; they need to feel comfortable that they will get their money back. As a result, there are certain criteria that must be met to receive loan approval, not the least of which is the quality of a subject property. In fact, it’s entirely possible for the condition of a property to be too poor to allow you to use traditional means. More often than not, banks have turned down loan requests for homes that are in need of too much repair, simply because they look like a bad investment on the surface. But, again, seller financing isn’t constrained by the same rules. With seller financing as an option, no house is off limits. That means investors can look for those “ugly” houses with great spreads and not have to worry about getting a loan or not.
Of course, not every seller will be open to the idea of financing their own property. For better or for worse, seller financing for real estate is a foreign concept to homeowners that have sold many properties, let alone a single one. Many sellers will reject the idea initially because they are unfamiliar with it, but I digress. Ignorance is far from bliss in the world of real estate investing. It may, therefore, be in your best interest to convince said owner that seller financing helps everyone involved. Therein lies the secret to seller financing: letting the seller know what they stand to gain. You see, it’s only when a seller has a reason to consider owner financing that the option becomes viable, so it’s up to investors to help them see the light.
There are many reasons a homeowner may want to consider seller financing. Those whose homes aren’t selling or those operating under tightened lender guidelines to try and facilitate a sale, in particular, may be interested in the idea of seller financing. At the very least, seller financing may be the only way they can actually sell their home. If that’s not enough, homeowners that choose to go down this road will also profit from interest income while simultaneously limiting their tax liabilities. You see, taking proceeds from the sale in payments that span a longer period of time won’t represent a major hit come tax time.
There are essentially a number of reasons owners should at least consider financing a home through the seller, and you would be wise to remember them if you ever find yourself trying to persuade a homeowner to consider seller financing for real estate.