How do I pay back seller financed deals ?

Question

Hi everyone,

As I get closer to purchasing my first rental property, I notice that I may have the opportunity to take on a seller financed deal. However, my confusion comes as to how this seller will be paid back at the end. I understand that in terms of leveraging I can have a lower down payment amount which is beneficial for me, and as the months go buy I will be paying the seller "mortgage + interest" though its not really mortgage. I understand seller financed deals last about 5 years on average, so after 5 years how do I pay this seller back? Is it this time where I go and pull a conventional loan? Do I do a refinance? I dont understand how this will work. I am looking to getting into Section 8 rentals in Ohio with properties under 100K, sure there is room for forced appreciation but I can't see it being more than 20-30k which is certainly not enough to pay back the seller for the full amount. Excuse my ignorance, just trying to navigate the financing side of things as this is where the success in leveraging really lies.

Best,

Nathan

Account Closed · Answer

Yes, eventually you will be asked to refinance to pay the amount owed. Talk to a mortgage broker where you will be buying properties about your plans, so you can know what your options are.

Steve K. · Answer

It depends on the specifics of the deal and your personal situation. The benefits of seller financing are that it often doesn’t count against your maximum number of conventional loans, sometimes you can negotiate a better rate and terms, or a lower down payment, or make your payment lower than conventional by doing interest-only or amortizing over a longer timeframe etc. But other times a conventional loan is better than what a seller will agree to. Seller financing terms vary and are complexity negotiable so it all comes back to what you can negotiate vs. what your lenders are offering, and whether or not you’re worried about maxing out the number of mortgages you qualify for, etc. I like seller financing because it’s hard to get initial cashflow in my area and I’ve been able to achieve that through seller financing and just making interest-only payments, with a 5 year note but amortized over 30 years. That makes the monthly payment lower than if I had gone conventional, and since my strategy is value-add and I’m in an area with high appreciation, I’m able to cash out refi in a few years into a long term conventional loan before the end of my seller-financed term. I always ask about it but only a small percentage of sellers are into it (typically those looking to get out of the game, but who still like the idea of truly passive income/ being the bank, and are spinning off a large portfolio so they may see a benefit in spreading out their capital gains hit).

David M. · Answer

@Nathaniel K. Again, it depends... I guess the short answer is if you can get better terms from the seller, isn't it better to effectively borrow money from the seller? Also, everybody is so "oh my god rates are so expensive right now..." So, maybe rates will be lower in the near future so it will be better to refinance then.Yes, there are many risks/complications with borrowing from the seller/prior owner long term..

Nathaniel K. · Answer

@David M. This makes a lot more sense. I see all these people talking about putting such low down payments using seller financing which makes sense as to how they are able to scale to so many properties in their portfolio. But from my understanding at the end you’d be pulling out a conventional loan anyways so maybe it’s just better to go the conventional loan to begin?

Nathaniel K. · Answer

@Steve K. In this case it sounds like it may be better to just go the route of conventional loan ? In the view of scaling my portfolio would it then make sense to refinance my conventional loan to then use that money for a new down payment of another rental?

David M. · Answer

@Nathaniel K.uhmm... It really depends on the deal...In a seller finance, you purchase the property with the seller taking a Note from you as part of payment. Yes, it is a mortgage. You give the mortgage to the then seller, instead of to a lender/bank. You need to determine your terms and get a proper Note and Mortgage written, executed (at closing), and recorded.So... IF your terms that you pay for example 5% amortized over 30 years for a term of 30years, then you will be making a fixed monthlypayment in accordance with the approrpirate amortization table, like any other residential loan, and that payment will be a mix of principal and interest.Nothing says that a seller finance deal has to be a 5 year term. It could be 1 year, it coule be 7, it could whatever you two agree.So, perhaps to your question... Its just a loan.. So, you get another loan, just like refinancing, to extinguish the current loan. Obviuosly, you would need to qualify...

Steve K. · Answer

If you don't have cash to pay off the seller at the end of the term, you would need to refinance into a conventional loan or figure out other financing at that time. I typically see a higher than normal down payment (30-50%), a higher than normal interest rate (about 1% above prevailing rate), interest-only payments, and 5-7 year terms. But it's entirely up to you and the seller what you agree to.