Seller Financing???

[Veronica Roye]

Hi! I ran across a property that is offering seller financing. I have heard this term a lot here on BP, however I'm not sure how I can and would benefit from such an offer. Apparently you have to qualify for it. I don't have liquid funds available and my credit is not exactly the best, a little less then good actually. If I were to consider an offer on a duplex how can I build my portfolio with this offer? Thanks

[Robert Leonard]

@Veronica Roye!

PROS

Seller financing can offer several benefits when you deal with someone offering good terms. You save on closing costs, because you don't have the normal appraisal, origination fees, points etc. If you had a high debt to income ratio, this seller financing will not appear on your credit file. With the qualification requirement, you still have to qualify for the financing (thanks to Qualified Mortgage (QM) rules in the new Dodd-Frank regulations that just went into effect in January) you shouldn't be set up for failure.

Why would an investor (seller) offer financing? It allows the seller to make a better return on their money by charging you 8-10% rate of interest than they would make if they sold the property to someone who paid cash or obtained bank financing. They would then have to take their money and figure out where to invest it to get that kind of rate of return.

CONS

Without an appraisal, you better know what you are buying, because sometimes, sellers will owner finance to get more for the property than the bank would finance to an outright buyer. Don't buy any "anticipated appreciation" BS. Appreciation happens, but it's never guaranteed, so you shouldn't pay for it. In your case, you lose the good payments that would have gone on your credit history if you financed through a traditional lender instead. Some of the savings on closing costs will be negated by the new qualification requirements - I haven't seen pricing on this service yet. The qualification has to be performed by a RMLO (registered mortgage loan officer) to be a qualified mortgage and keep the seller out of court in the event of default.

Beware of the nefarious seller who doesn't intend to sell, but they are on the no maintenance real estate investor con game. They will buy properties and never touch them. They want to get a good down payment, and you do any maintenance, you pay for any repairs needed, you pay the taxes and insurance. Then they get as many payments from you as they can get and at the first glitch in the arrangement, you are considered in default and you get the boot. Under any other financing arrangement, you might take a hit on your credit report or have to sell the property that you have some equity in, to fix your situation, but that's not an option when they use strategies that are faster than foreclosure to take the property back. Then they do it again to the next sucker! This WAS used on owner occupant buyers, and while the QM rules protect owner occupants, they do not apply to financing to investors! So it's just a matter of time before those who want to be investors start getting targeted by those characters.

In summary, seller financing can be a good thing, but the devil is in the details!