Bank Won’t Lend? Cut Them Out! How Seller Financing Works

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When banks tighten up lending, the best real estate investors begin to leverage more favorable lending strategies. One of these strategies is seller financing, also called owner financing. This strategy can allow homeowners to sell their home faster because buyers can benefit from lower qualifying standards and down payment requirements.

What Is Seller Financing?

Seller financing is when the seller of the property loans the purchase price to the buyer. In this situation, the seller basically becomes the bank and holds a note for the buyer. Based on agreed-upon terms, the buyer then pays the seller back, typically every month, until that loan is paid in full. Should the buyer default, the seller can foreclose and take the property back.

This is a great opportunity for real estate investors because it allows for the purchase of property without having to rely on a bank. If you have bad credit, or you have reached the maximum amount that a bank will loan you, you can tap into this strategy and continue to grow your portfolio.

These loans are typically shorter-term, with amortization over a 30-year period and a balloon payment due in three or five years. This timeframe typically works because it allows the buyer to build equity in the house and ideally have improved finances or more favorable market conditions to refinance the loan. But the terms are always negotiable. While the terms are generally worse than what a buyer could get from a bank, buyers can save a lot in origination and other fees by pursuing this strategy.

The buyer signs a promissory note with the terms of the loan and either a mortgage or deed of trust. This allows the seller to foreclose on the property if the buyer does not pay. Title is fully transferred to the buyer, and the buyer is free to refinance or sell the house at any time.

Related: The Definitive Guide to Using Seller Financing to Buy Real Estate

When Is Seller Financing an Option?

In order to leverage seller financing as an option, you have to know that the seller has the ability to support this type of financing. When the seller has equity in the house, they are best suited to accommodate it. If a seller owns the property free and clear, then they can fund the entire purchase.

Alternatively, they can still leverage this strategy if the buyer’s downpayment covers what they owe on their existing mortgage, and they can pay it off at closing. If not and there is still a balance owed on the mortgage, the seller’s lender will have to agree to the transaction. 

How to Take Advantage of Seller Financing

Once you know that they have the ability to seller finance, you then need to communicate with the seller that this is an option you are looking to pursue and start the conversation. A lot of sellers may not even be familiar the concept or typical terms. But it never hurts to ask the seller if they’re capable of doing it and willing to entertain the option. 

If the answer is yes or maybe, then the negotiation begins. 

The best part about seller financing is that you can get as creative as you’d like with the terms, agreeing to whatever is suitable for both you and the seller. This includes but is not limited to negotiating both the down payment and the monthly payment. Offer what makes sense to you, and negotiate with the seller to come to something that you can both agree on.

Related: Seller Financing: Benefits & Drawbacks Investors Should Know

How to Approach an Owner About Seller Financing

Buyer: Is there any room for seller financing?

Note that you may have to explain what owner financing is at this point. Sometimes real estate agents don’t even understand it, so you may have to educate both the seller and the agent. I’ve also found that connecting them with an expert is much more productive than trying to advocate as an interested party.

Seller: It’s possible.

Buyer: I’d like to make you an offer. I can pay $5,000 over asking price if you can finance the home to me.

Seller: On what terms?

Buyer: I can give you a 10% down payment and pay 5% interest over a 30-year period.

Seller: That’s too long, I can’t hold a note that long.

Buyer: We can keep those terms and have a balloon payment due after 5 years.

Seller: OK, I will consider it.

Related: Negotiating Seller Financing: The Definitive Guide

Obviously, this is very simplified and the conversation likely won’t be this easy, but you will never know unless you ask!

The lesson here should be that if you don’t have good credit or enough for a 20% down payment, you’re not disqualified from purchasing a home. This is just one of the ways you can still buy real estate without meeting the bank’s requirements.

Considering buying or selling with seller financing? Why or why not?

Comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.