I still don't get why Homeowners would sell via Seller-Financing

Buying & Selling Real Estate
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I still don't get why Homeowners would sell via Seller-Financing

Rohan J.
Los Angeles, CA · Member since 2015 · 176 posts · 48 votes

Hey BP,

I've read a lot about the pros and cons about buying rentals through seller-financing, and I'm still unclear on why a seller would be interested in selling his property through this method. I'm trying to better understand this financing option more deeply right now in order to 1) figure out which type of homeowners I should target and 2) create the proper pitch that outlines the benefits of this financing, in order to make a less-experienced seller more comfortable with the proposition.

It looks like the main benefit of seller-financing is the fact that an owner would get payments spread out through 30 years instead of receiving one lump sum payment, but then my question would be: why wouldn't an owner just rent out their home instead? Wouldn't they accomplish their same goal of cash-flow by simply renting it out and holding onto it instead of selling it via seller-financing?

Would love to hear anyone's experience with seller-financing, and whether they would do it again. I'm afraid of being exploited in some way through this option, and obviously the last thing I would want is to get screwed in the end somehow and not actually receive the property. 

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Jeff Filali
Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
9y

I always offer Seller Financing on most the properties I sell. The reasons I do: A) I can sell for full premium price; B) I can sell the property fast if others in the area are moving slow; C) I get a nice return on my investment, usually better then most other investments (I typically charge 20% Down and carry the Note for 10 years at 10% APR); D) better cash flow without being a landlord or dealing with landlord hassles (NO Repairs, NO Calls, NO Reserves needed, NO Property Taxes, NO Property Insurance payments; The payments come in and if I don't have a mortgage, the funds are 100% cash flow.)

When buying a fixer-upper property and rehabbing it, you can average well over 20% APR return on the net cash invested when offering seller financing!! Even if you only charge 10% APR, you get to ask for full premium price, which has to be figured into the returns.

EXAMPLE DEAL-

ARV: $110,000 Purchase Price: $45,000 Repairs: $15,000.00 Total Invested: $60,000

Sold for: $109,900  Down Payment Collected: $20,000   Net-Cash Invested: $40,000

Balance Receivable: $89,900 Financed with Seller Carrying the Note at 10.0% APR for 120 Months

Monthly Payments: $1,188.04  Total Principal + Interest Return: $142,564.21

Total Profit: $102,564.21 or 25.6% APR (If seller carried it for 30 years, its still over 20% APR)

Plus none of the hassles of being a landlord!! 

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  • Ruth Bayang
    Investor · Kent, WA · Member since 2015 · 624 posts · 274 votes
    9y

    I'll take a shot at answering the part about why an owner wouldn't just rent out their home instead.
    When renting out, they are a landlord and they are responsible for fixing stuff when it breaks.
    When they are doing seller-financing, they are the "bank." The buyer (now homeowner) fixes his own stuff. Also, renter mentality versus owner mentality .... owner will take much better care of the property.
    In some cases, payments received through seller-financing are higher than market rent.
    Some people have cash to put down but can't qualify for a bank loan. So seller-financing is a good fit for them. They get into a house and are willing to pay more than market rent. Because they're not renting. They are owning.

    3Reply
  • Rohan J.
    OP
    Los Angeles, CA · Member since 2015 · 176 posts · 48 votes
    9y

    @Ruth Bayang Good points. I figured hiring a PM would take care of the problem of having to do anything to actively manage their properties, but I guess you do have to manage the PM as well :) 

    0Reply
  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    I always offer Seller Financing on most the properties I sell. The reasons I do: A) I can sell for full premium price; B) I can sell the property fast if others in the area are moving slow; C) I get a nice return on my investment, usually better then most other investments (I typically charge 20% Down and carry the Note for 10 years at 10% APR); D) better cash flow without being a landlord or dealing with landlord hassles (NO Repairs, NO Calls, NO Reserves needed, NO Property Taxes, NO Property Insurance payments; The payments come in and if I don't have a mortgage, the funds are 100% cash flow.)

    When buying a fixer-upper property and rehabbing it, you can average well over 20% APR return on the net cash invested when offering seller financing!! Even if you only charge 10% APR, you get to ask for full premium price, which has to be figured into the returns.

    EXAMPLE DEAL-

    ARV: $110,000 Purchase Price: $45,000 Repairs: $15,000.00 Total Invested: $60,000

    Sold for: $109,900  Down Payment Collected: $20,000   Net-Cash Invested: $40,000

    Balance Receivable: $89,900 Financed with Seller Carrying the Note at 10.0% APR for 120 Months

    Monthly Payments: $1,188.04  Total Principal + Interest Return: $142,564.21

    Total Profit: $102,564.21 or 25.6% APR (If seller carried it for 30 years, its still over 20% APR)

    Plus none of the hassles of being a landlord!! 

    7Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Jeff Filali  if your selling these to home owners are you running through the QM process as those loan terms for owner occ are sub prime and have federal guidelines you must adhere to.

    I will often sell some of our orphans to investors with owner carry

    and yes gets you premium price usually.. and transfers ownership to the buyer.

    with 20k down your in pretty good situation .. I suspect you are selling to a large hispanic crowd in your area.. IE those that can actually save 20k  and will adhere to those terms as they are just happy to get into a home.

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  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Jay Hinrichs Yes.  I learned a lot in 2016.  I'm all in now!!

    Most of mine are typically around half those example numbers, but the returns are the same or better. I primarily deal in homes around $50K or less. Purchase for $30K, sell for $55K but I do try to get 20% down, and 10% APR. I'm only carrying my notes for 10 years for now, but in the future as my business grows, I will be a lot more open to 30 year notes. Have to be to extend far enough into retirement.

    I started off planning to do rentals or RTOs, but once I discovered all the benefits of seller financing, it made a lot more sense for my investment plans. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Jeff Filali  i grew up in the owner carry business my dad did thousands of them literally.. but that was on land and lots... note business is beautiful..

    just want to make sure the public out there is aware of dodd frank and QM rules for sub prime loans and those terms are sub prime... 

    but yes I love it.. you will retire rich can guarantee it !!!!

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  • Jacob Ghena
    Realtor · Medford, OR · Member since 2016 · 26 posts · 14 votes
    9y
    Rohan, I would like to encourage your initial suspicion of seller financed deals. If a seller is choosing to receiving a $1,000 a month vs $100,000 up front it begs the question why? Most seller financed deals exist because either the property, buyer or sales price won't qualify for traditional financing. Especially in regards to SFR, I find it rare that seller financed deals are win-win for both buyer and seller. Not saying it doesn't happen and I'm sure the BP community has countless examples of seller financed deals that work out great for all parties...I'm just wanting to emphasize you understand the sellers motivations up front. Most people when they win the lottery take the lump sum....human nature doesn't change just because it's real estate.
    0Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    My observation has been that seller-financing always equates overpriced properties....

    1Reply
  • Rohan J.
    OP
    Los Angeles, CA · Member since 2015 · 176 posts · 48 votes
    9y

    @Jeff Filali Sounds like you are in a very interesting and profitable business! 

    Just so I understand this correctly, it sounds like you're buying properties at a discount, fixing them up, and then selling via seller-financing on 10-Yr notes? Essentially you're owning the profits at all parts of the lifecycle? Sounds amazing.

    Do you typically buy all your properties with cash?

    0Reply
  • Rohan J.
    OP
    Los Angeles, CA · Member since 2015 · 176 posts · 48 votes
    9y

    @Jacob Ghena Thanks. I especially like that last sentence... human nature definitely does not change so easily :)

    @Diane G. I agree that typically the properties are overpriced (assuming everything else is legitimate). Unfortunately, I cannot continue to pay 20-25% down if I want to really grow my portfolio, so I'm just trying to assess a few different avenues to get creative with financing. I would be willing to pay a slight premium on price if it meant I could get something for <10% down. Other avenue I'm looking into is getting investors involved, but that would take a lot longer to get buy-in/set-up legal requirements/etc.

    0Reply
  • Jeff Filali
    Rental Property Investor · Broken Arrow, OK · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Rohan J. Mainly cash, yes. I buy them cheap (Motivated Sellers or Foreclosures), usually 50-60% of ARV minus repairs. I wholesale flip some that I purchase to other investors or rehabbers, if they don't sell within the first few weeks, I rehab them and list them FSBO the next month at full value but always mention in my ads that I may consider seller financing with 20% down. When I wholesale them or sell for cash, I roll that money right back in to purchasing another property. But yes, its going pretty good so far and as you run the numbers, it makes a lot more sense to me then dealing with landlord issues.

    0Reply
  • Account Closed
    Johnson City, TN · Member since 2014 · 586 posts · 705 votes
    9y

    @Jeff Filali How are you complying withe the Dodd Frank law? Do you use a licensed mortgage originator?

    0Reply
  • Mark Allen
    Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
    9y
    1) Owner reduces tax expense up-front by spreading it throughout the life of the loan. 2) Owner doesn't have to deal with maintenance issues or tenant turnover (unless foreclosed on) 3) Owner can sell asset at 10% above market value (I.e. $100k home on retail market could sell for $110k) 4) Owner can sell note at any time on the open market if he/she needs to liquidate. Probably not applicable in "wrap mortgage" situation. Probably a few more but spit this out between a weight room set.
    1Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    Agree with @Diane G., it's to get a premium price for the property.  Basically, it's because someone who can't qualify with conventional financing is willing to pay more than the cohort of buyers that can conventionally finance the property are willing to pay.  That's not to say there isn't a win-win to be had for both sides of the deal but it's best to go in with your eyes wide open: investors who can quality to finance conventionally are choosing the pass on the deal at the current price.

    0Reply
  • Diane G.
    CA · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Rohan J.

    It is also my observation that those with seller financing usually have some major show-stoppers, such as bad location, right off a high way, foundation issues, etc.... that made the property less desirable and most buyer choose to pass....

    But this is not to say you can't find a property that has no hidden issues, this is only to say be twice as cautious....Good luck...

    0Reply
  • Bob Derwin
    Investor · Mountaintop, PA · Member since 2013 · 110 posts · 57 votes
    9y

    I just closed my first seller finance deal. I found the home listed for the county tax auction. After performing my own title search, I discovered that there was no outstanding mortgage, but there were 3 liens on the property. I could tell the home was vacant, but doing some internet research, I was able to locate the owner living in another town about an hour away. I contacted her and asked if she would like to sell, rather than take the chance of losing the property at the tax sale. After looking at the property, most of the work that needed to be done was cosmetic in nature, so I offered her 80K (the ARV is 160K), 30K in cash (so she would have money to settle the liens and pay the back taxes at closing, plus put a few dollars in her pocket) and her needing to carry a note for the other 50K. She accepted the offer. I've put 15K in the home to make it rent ready, and now have a cash flowing property, that I will own outright in 5 years.

    0Reply
  • Tim Nelson
    Menomonie, WI · Member since 2015 · 25 posts · 5 votes
    9y

    I think the major advantage is the owner collects the interest instead of the bank, so over the course of the land contract the owner could pocket thousands of dollars more by seller financing than selling outright. Also, in my experience (I've purchased two homes via seller financing) the owner owned the properties outright and didn't need the money right away to pay off a mortgage. He was more than happy to collect his mortgage payment each month and go skiing with his wife while I managed the property.

    0Reply
  • James Wise
    Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes
    9y
    Originally posted by @Rohan J.:

    Hey BP,

    I've read a lot about the pros and cons about buying rentals through seller-financing, and I'm still unclear on why a seller would be interested in selling his property through this method. I'm trying to better understand this financing option more deeply right now in order to 1) figure out which type of homeowners I should target and 2) create the proper pitch that outlines the benefits of this financing, in order to make a less-experienced seller more comfortable with the proposition.

    It looks like the main benefit of seller-financing is the fact that an owner would get payments spread out through 30 years instead of receiving one lump sum payment, but then my question would be: why wouldn't an owner just rent out their home instead? Wouldn't they accomplish their same goal of cash-flow by simply renting it out and holding onto it instead of selling it via seller-financing?

    Would love to hear anyone's experience with seller-financing, and whether they would do it again. I'm afraid of being exploited in some way through this option, and obviously the last thing I would want is to get screwed in the end somehow and not actually receive the property. 

    There are a lot of folks out there selling books that may tell you otherwise but the truth of the matter is most owners will not sell their home via owner financing.

    Furthermore, If an owner actually does sell to you via this method it is almost never on a 30 year term. 3-10 being the most common.

    There are a few things you need to fall into place to actually do one of these types of deals.

    • One would be a motivated seller with a unique building. In my career I have purchased many odd commercial buildings that were vacant for many years on owner financing. Ya see everybody and their brother is looking for houses, not many people want vacant commercial space.
    • Another time it's right is when the building costs a lot. Selling while holding the paper isn't to bad when you get a 30k or 50k down payment. Who in the world would sell with a 3k down payment? May as well just rent it at that point. So this excludes all low value property from being a likely owner financed acquisition.
    • Last thing you need going for you is trust. Sellers need to trust you or be familiar with you. If your known in the community it's much easier to get a loan from a seller then just another guy off the street or the internet.
    1Reply
  • Rohan J.
    OP
    Los Angeles, CA · Member since 2015 · 176 posts · 48 votes
    9y

    @Bob Derwin

    @Tim Nelson

    Thanks for the responses! I'm interested in hearing your thought process throughout your seller-financing deal.

    How did you find it? Who did you work with to ensure you didn't potentially get scammed (e.g. what kind of attorney, accountant, etc)? Any tips on what I should make sure to look out for in the fine print? 

    Would love to hear the details of your deals!

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    9y

    Interesting discussion, we sell with owner financing on a regular basis.  

    Our model is buy, rehab, and sell with owner finding.  Occasionally we will sell the note after the sale but we like the cash flow, and are not afraid to go out 20-30 years.  We always offer our buyer the 20 year option, but most people just look at the payment and pick the lower one.  The nice thing about a longer term financing is that is they do a refinance latter we still get most of our capital back.

    0Reply
  • Bob Derwin
    Investor · Mountaintop, PA · Member since 2013 · 110 posts · 57 votes
    9y

    I found my seller, because the house was up for tax sale. The home was vacant, but the tax sale did give me the person's name. A google search provided an email address. The email address turned out to be the right person. When I contacted her I was lucky, as she had moved on with her life, she was ready to sell, and there was NO mortgage on the home. She did owe back taxes of 13K, plus another 7K in municipal liens. Based on this, I knew I would have to give her some money at closing. The home had years worth of clutter, plus a very strong pet urine smell, but structurally (except for leaking skylight), my contractor found the home to be solid. Note that none of the utilities were on, so I had no way to test plumbing, furnace, or electric, but I used this to my advantage in negotiating. I offered 80K as the house stood (she could remove whatever belongings she wanted, and leave the rest for me to deal with), or I would pay 90K if she got the utilities turned on so I could do proper inspection to ensure everything was working. She was at 100K, and I was at 80K/90K. I told her based on the work needed on the home, that the 80K/90K (30K cash/50-60K owner financed), was my best and final offer. I knew she would need at least 20K to close, plus I figured if she walked away with some money in her pocket, she would be more apt to accept my offer. The next day she contacted me and said she would accept the 80K "as is" offer. I had my real estate attorney (all he does is family law and real estate) draw up a seller disclosure (required in PA), a sales contract, a note, and the mortgage document. I provided her these documents for her attorney to look over. She required a few minor changes to wording in the sales contract, but 4 weeks later (there were some other minor title issues that needed to be resolved, or we would have closed in 2 weeks), we closed on the home in my attorney's office. I had the deed recorded in my LLC's name, and she had the note and recorded first position mortgage. I am paying 3.5% over 5 years on 50K. I actually just returned from there as we had the water turned on today (gas and electric were done before Christmas). Other than needing a new pressure relief valve, the plumbing is good. At this point, we are down to just flooring and paint to finish up. I should be all in at around 95K for home with an ARV of 160K. Already have a tenant lined up for Feb 1 at 1350/mo rent. So I have positive cash flow of approx 190/mo. Please note this does NOT include any maintenance reserve, CapEx, or Management. I have 3 other residential rentals, plus a commercial building, that I already manage, so adding on another SFH to manage is no big deal. The reason I structured the deal for 5 years rather than a long term (and more immediate cash flow), is that my twin daughters will be graduating high school in 5 years, so I'd like to have as many of my rentals paid in full by that time as possible. Plus, I figured by her getting a higher monthly payment, she would be more willing to accept my offer.

    0Reply
  • Rohan J.
    OP
    Los Angeles, CA · Member since 2015 · 176 posts · 48 votes
    9y

    Hi @Jay Hinrichs - what is the cutoff for an interest rate to be considered subprime? 

    I have been speaking with an investor who outright owns 13 SFRs/duplexes, and wants to sell them off and retire. I'm thinking of asking him if he'd be interested in doing a seller-finance.. I just need to come up with terms that would make it a win-win for both of us.

    Total value of all his properties is probably $500-600k. I'm thinking 5% downpayment with the remainder being financed at 6% over 10 or 15 years.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Rohan J.  sub prime does not apply to NON OWNER OCC

    don't recall the exact figures but its pretty conservative.. like 2% over average rates at that time and any loan that is shorter than 30 years.

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  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    Seller 100% financing is an Installment Loan which has tax advantages.  Call your CPA for the nitty-gritty.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    9y

    Well, sub-prime does affect non-owner occupied, the term is not limited to owner occupied for residential properties.

    I see we have newbies again selling at a premium, ever hear of predatory dealing? 

    As a dealer, beyond exemptions Dodd-Frank does apply and no one but Jay can begin to underwrite a sub-prime loan, not sure he can but I suspect he can, just not as well as I can, LOL.

    Today, you can find trouble quickly selling a residence that won't appraise out for conventional financing. 

    Financing does not add value to any property or to the dirt!

    Look up "Usury Laws" we seller finance because that amount of money can't yield a higher return with the similar risk accepted. 

    Jeff is pounding on predatory pricing, lower income housing in Broken Arrow is pretty much for the cons and that is changing just like everywhere else, they are under federal regulations, many investors think they know, but they are still in the dark. I advised the public housing authority in Broken Arrow, OK. BTW.

    Good points, taxes are deferred, interest the seller gets is usually higher than CDs, properties are more marketable as a buyer who doesn't otherwise qualify may buy, like an investor.

    Like all other seller financing threads, you can't get into them past 3 or 4 posts without getting bad information or implied transactions that have issues legally. Just need to know who to listen to and who to fluff off. You won't get rich seller financing if you're dealing legally and ethically, but it sure is more profitable, it's just not overnight......  Good luck :)       

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