[SELLER FINANCING] why doesnt the selller Refinance the property?

Question

When you do seller financing with a property free and clear, why doesnt the seller refinance in order to pull out some equity? Wouldnt it better than wait 5 years and getting monthly payments?

DJ M. · Answer

DTI issues.  On one they are getting paid interest, and on the other they are paying interest. In my area on LCs title usually goes into escrow. And honestly, once you math out LCs, you can get a pretty good return. Where I am from you see 7%-9% interest as most common. Thats a decent return for a fairly passive investment

Jeff Bridges · Answer

Some psychological factors of seller financing vs. refinance: a) seller is exhausted with being landlord and simply does not want to manage tenants/maintenance/hassle of taking out a new loan and therefore still being landlord at the end of the process. B) Selling the property with seller financing both relieves the seller of responsibility of the property and provides a tax friendly approach to getting the income back in installments as opposed to in a lump sum C) Seller receptive to seller finance might be older and likely already paid off a 30 year loan and not prepared to take out another loan which would adversely affect his estate to his beneficiaries. He's already got the property free and clear and might be opposed to having to make payments again. D) the interest rate on seller finance (4-10%) might beat whatever he can earn using a lump sum in the stock market in other passive investments so why not use his existing equity to earn more than the general market using a passive strategy of being the bank.

Steve Vaughan · Answer

I can give you my view on why we don't refinance to pull out some equity and if it would be 'better' than waiting 5 years...

First off,  not every free and clear investment is a house.   The bulk of mine are commercial apts.  Appraisals alone are over $5k, LTVs for cash are low, rates are adjustable, loan is callable and I have to submit my financials to them every year, hat in hand.  Wouldn't it be better to get equity?  Not with these.

Its difficult to explain time horizons in decades to the average person. I don't personally think in weekly or monthly time chunks like w2 people.  My minimum look up to see where I will be is 5 years, usually 10 or 20.  So not having a mortgage is ok for me.  As long as I have reserves and dry powder, another chunk from equity stripping only represents hassle.

Hassle to redeploy the cash effectively. I have to beat 5% + risk, min. Hassle to qualify.  6 weeks of paperwork.  Hassle to pay $4kish in fees. Hassle to start with one lender,  then get substitute trustees at least 2 more times.  Get the mortgages finally set up on auto-pay with 2nd servicer and wouldn't you know, transferred to a new one again with different rules after 12 on-time payments

One Napper's view on why it may not be 'better' to strip equity out of free and clears.

Jake Denning · Answer

I will write a quick disclosure and say that I am relatively new but I have been doing quite a bit of reading on "Seller Financing" between classic owner finance and wraps.

As far as classic owner financing (free and clear property) the potential benefit there which is dependent on the owner and their outlook but when they owner finance typically they will ask for as much of a down payment they can get without letting the potential buyer totally run out of cash (so 5-10k less than what they have in the bank) the seller can also get 8-10% on interest when they do a seller finance. A typical refi- will only give you 70-80% of the LTV (loan to value) which can be a great move or lets say they have a property worth 100k and they decide they will owner finance it for 110k, they could get a 10k downpayment and the finance 100k for the next 15-30 years at 8-10%. A lot of times the potential buyer won't actually go all the way through the purchase so maybe they only pay down the debt for 2 years and then their situation changes so they leave, well then you just basically got 8-10% on the 100k for the last two years and then you can go do it again for someone else and potentially get another down payment and perhaps property value increase and now you can owner finance the note at 115k for the purchase price. With that being said you should still properly qualify your buyer and make sure they can make the payments and will not be living check to check (that is IMMORAL). There are also some recent SAFE and Dodd Frank laws that limit the number of these you can do in a rolling 12 months so to my understanding a lot of investors are stepping back from this method because it is not quite as advantageous but still PROFITABLE!

Hope this helps and if any part of this is incorrect for you pro-investors out there please let me know and I will certainly revise- I am in Texas and that is my understanding here!

Regards,

Jake

[SELLER FINANCING] why doesnt the selller Refinance the property?

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