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Seller Financing Advice & Feedback
Hi I am considering offering seller financing for a property and want to get ideas on terms to offer and a general experience that any bigger pockets members had as this would be my first time offering this. My initial idea was 10-20% down with 7% interest rate for 10 or 15 years after doing research. 1 person suggested a balloon at the end and another person advised against it. Please tell me if any of you have done seller financing before? How did it work out? What were the terms? Was it worth it? Looking for a discussion for ideas on what I should consider from those more experienced in creative real estate financing.
Hello Tara,
I have not done seller financing however I have refinance a lot of loans that where seller financing. Most of them have a balloon payment. It makes sense to get your equity out. The rate you are offering sounds low in my opinion. But it could be good for a buyer that wanted an investment property.
@Salvador Auciello Thank you for your input. What rate do you typically see?
I recently gave a similar answer to a similar question.
The beauty of creative real estate deals is you can craft an offer to solve the seller's problems. Those are most likely to be accepted. You can also do it in a way that benefits you.
First, figure out what payment the property can afford. You can't pay more than that.
Then, sit down with the seller. Build rapport. Ask why they're selling and what they plan to do with the money. If it's currently an investment property, property taxes may be your best friend. The seller may face a big tax bill if they receive a pile of cash at closing. Seller financing helps them.
The takeaway is you can't craft an offer unless you know what problems the offer solves.
Also - you don't have to offer interest at all. An offer as simple as "I'll pay you $1,500 per month for 360 months" is a legitimate offer. Especially if they aren't sharing the info I mentioned above. Then if they say your offer won't work, you can respond. "oh, why is that?"
Hi @Marco Bario I am the seller. I was asking from a seller's point of view.
If you're selling, it's about the payer.
If you're selling a single-family home to an owner-occupant (I don't know if you are) – the "perfect" seller-financed note is 20% down, 10% interest, 10-year term. But that's a unicorn.
Why? There's a balance between what's good for the seller and what works for the buyer.
If the buyer can't afford the payments, they've been set up to fail. No one wants that.
In today's environment, try to set the interest floor at 7%... more of you can make it work. Avoid a 30-year term unless the payments aren't affordable otherwise. 15 - 20 years if you can. Minimum 10% down. I'm not a fan of balloons... but if there is one, I suggest 7 years or longer.
You can look at area comparable rents. Keeping your payment in the range of rents (allowing for expenses a homeowner will pay and a tenant doesn't) tends to keep owner-occupants on track.
Your attorney or an attorney-owned title company can create the docs and manage the closing. There's something called a "lender's title policy" you should ask them about and have your buyer pay for at closing.
After you close - use a loan servicer to collect payments. Your promissory note can require escrowing taxes and insurance. A loan servicer can collect this and make tax and insurance payments. Other benefits here also.
Finally... the best advice I can offer is to use a third-party underwriter. They'll take a loan app, pull credit, verify income, and verify the ability to repay. Your buyer can pay for it at closing.
@Marco Bario this is perfect thanks so much this exactly what I was looking to get feedback on. Thank you for this reply.
I did Seller Financing for a business I purchased.
We did their price and did a 2% Down Payment with Terms that we called "Step Up" we started with a low monthly payment but every 12 months we increase the monthly payment too. This allows us to stabilize, then grow without worrying about a high debt payment in the beginning.
Quote from @Marco Bario:
If you're selling, it's about the payer.
If you're selling a single-family home to an owner-occupant (I don't know if you are) – the "perfect" seller-financed note is 20% down, 10% interest, 10-year term. But that's a unicorn.
Why? There's a balance between what's good for the seller and what works for the buyer.
If the buyer can't afford the payments, they've been set up to fail. No one wants that.
In today's environment, try to set the interest floor at 7%... more of you can make it work. Avoid a 30-year term unless the payments aren't affordable otherwise. 15 - 20 years if you can. Minimum 10% down. I'm not a fan of balloons... but if there is one, I suggest 7 years or longer.
You can look at area comparable rents. Keeping your payment in the range of rents (allowing for expenses a homeowner will pay and a tenant doesn't) tends to keep owner-occupants on track.
Your attorney or an attorney-owned title company can create the docs and manage the closing. There's something called a "lender's title policy" you should ask them about and have your buyer pay for at closing.
After you close - use a loan servicer to collect payments. Your promissory note can require escrowing taxes and insurance. A loan servicer can collect this and make tax and insurance payments. Other benefits here also.
Finally... the best advice I can offer is to use a third-party underwriter. They'll take a loan app, pull credit, verify income, and verify the ability to repay. Your buyer can pay for it at closing.
Thank you Marco. I love the feedback provided. Do you know any third-party underwriters?
@Victoria E. - Companies like Call The Underwriter and Texas Pride Lending provide third party underwriting services
Thank you for this.
You've gotten a lot of good feedback. I have talked to a few investors who have done this with their retirement funds. It can be a great investment. In some cases, the house came back to them. Here is what I gleaned from them.
It's for a buyer who can't qualify for a traditional mortgage. So your risk will be inline with or slightly higher than typical interest rates. They recommended, $5k or $10k down with a 7-8% interest rate with a 5 year balloon. That way, they have 5 years to improve their credit to qualify for a loan and then refinance. That way you get your money back sooner. In some cases, the buyer gave the house back because they were moving and still couldn't qualify for another loan. You do risk foreclosing on the buyer. A good Real Estate attorney can draw up a document very easily. Good luck!