How does seller financing work?

Question

I’m looking to buy my first BRRRR strategy, it’s also going to be my first home while we remodel, I don’t have a lot of cash saved up for the down payment/closing costs. I was just curious if anyone could give me a little more info on seller financing than what I’ve learned so far. From what I understand, when you get the seller to finance, you make payments to the seller until the down payment is paid off for that property, but how long do you pay? I can’t imagine someone would want to pay my down payment then wait 30 years to receive all their money back… that would be insane! I’m also pretty sure that if you miss a payment to the seller that you lose the property all together? So do you make the financing with the seller like a 2 year thing then quickly rehab the home and refinance with your bank to get your seller financing paid off? Thanks in advance!

Tom S. · Answer

@Travis Felchlia Welcome to BP!  I'll lay out an real life example of one of the first seller finance deals I did.  $80k purchase price, 10% down, so the seller financed the rest: $72k, 6%, 30 year amortization (payments = $432 per month).  You're correct that most sellers won't wait the full 30 years for their money, most will insist on a balloon payment in 5-7 years.  So you make your payments for 5 years, and then the balance is due, typically you'll sell or refinance at that point.

In my case I put about $40k of rehab into it over 6 months.  I then went to a bank who appraised it at $170k.  They would lend 80% of that, or $136k.   I'm all in at $72k + 40k rehab = $112k.  So I'll net $24k after the refinance (less closing costs).  That reimburses my original $8k and then some, and I can use that for the next place.  And I still have 20% equity in the rehabbed property.

So it takes work but can be done.  Good luck!

Wale Lawal · Answer

@Travis Felchlia

A bank isn’t involved in a seller-financed sale; the buyer and seller make the arrangements themselves. They draw up a promissory note setting out the interest rate, schedule of payments from buyer to seller, and the consequences should the buyer default on those obligations. Unlike a sale involving a mortgage, there is no transfer of the principal from buyer to seller but merely an agreement to repay that sum over time.With only two main players involved, owner financing can be quicker and cheaper than selling a home in the customary way. There is no waiting for the bank loan officer, underwriter, and legal department, and buyers can often get into a home for less money.

Read this article for more information https://www.investopedia.com/a...

Good Luck!

Andrew Postell · Answer

@Travis Felchlia if this is going to be your first home, why aren't we considering a "primary home"?  Why not go that route?  Is something preventing you from going that direction?

Joe Garretson · Answer

Staying there two years makes a huge difference with capital gains taxes so consider that with your plans. And you're right, you'll have to search hard for a broker who's familiar with the 203k loan. Most of them churn the typical FHA loan for a standard buyer. Have you searched the Network here on BP? Top tool bar, Network -> Mortgage Lenders... you'll find some there who can help.

Sylvia H. · Answer

Yes I'm aware of seller financing and rent to own. I financed my first home with seller financing and had a great experience.  Seller financing the downpayment would be considered a second mortgage and most traditional lenders will not allow that. They like to see the borrower make a contribution to the deal. Commercial lenders don't usually get involved in small deals. You could go private money but you will pay through the nose for fees etc. Traditional banks sell their loans on the secondary market therefore they underwrite to Fannie/freddie guidelines. You are talking about a 100% CLTV and many traditional lenders do not allow seller seconds.

Luisa Trigo · Answer

@Jonathan Klemm

Hello,

Chiming in on this conversation and wondering @Jonathan Klemm if you have done seller financing for both the down payment and the remaining amount? Or just for one or the other? And if you have done an interest only payment period during construction/renovation period and then P+I once the property is stabilized with new tenants in?

We’re looking at a property in Missouri that needs updating, my husband is a builder we would do the work, would like to do seller financing for down payment remaining loan amount with interest only payments while we do the work. We have to get funds to do the work too.

Any experience and insights on this model appreciated.

Thank you

Sylvia H. · Answer

Hey there. Question for you. Are you talking about doing a rent to own?

Travis Felchlia · Answer

Thank you johnathan i will definitely let you know when I’m over there!

Jonathan Klemm · Answer

No problem @Travis Felchlia.

Hey @Sylvia H. - Rent-to-own and seller financing are two different strategies.

Rent to own = would be if you already own the property (typically single family house) and you rent it to a tenant with the option to purchase within a certain time frame.

Seller financing =  Acquisition strategy where the seller acts as the bank and you pay them a monthly payment and downpayment at specified terms to purchase the property.

@Luisa Trigo - We aren't too far from you in Missouri, just a little NE up in Chicago.   The answer to all your questions is yes, as long as the seller (and bank if in the picture) agree to the contract terms.

You can set up seller financing however you want actually which is why it is such a great creative strategy.  You can do seller financing with just the down payment and have traditional bank financing (more typical on commercial deals) the only speed bump is whether or not the BANK will allow it.  You can also set it up for interest only while you add value and then refinance.  Everything is negotiable.

Jonathan Klemm · Answer

Hey @Travis Felchlia - Seems like you received a ton of great advice above.  We are always trying to pull off seller financing on our Chicago deals. If you are ever in the city and want to link up feel free to reach out and we can talk through the process.

How does seller financing work?

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