Seller Financing Questions

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Seller Financing Questions

Oron Subayi
San Diego, CA · Member since 2016 · 13 posts · 1 vote

Hi guys

Still learning on real estate, and one of the strategies I saw yesterday was seller financing

I have few questions on it..I want to make sure that I understand the concept, and I hope you can help me : )

1. All articles\blogs etc are talking about getting a "loan from the seller". The load is not an actual loan right? as I understand it, the load is actually register the property on the buyer's name, am I right?

2. How to deal with additional payment like rehab, insurance etc in this strategy?

When going to a bank or other lender, you can ask for a load that includes the additional expenses, but it seems that it is not relevant in this case. Looks like I must have the money in my bank account, so the low paydown not relevant as well, because I must have money for the other expenses

3. Why is interest involved in this kind of strategy?

When a buyer is negotiating with a seller, they agree on a price for the property - let's say the price is X$.

Both sides agreed to X, so why can't the buyer pay X$ with seller financing, and no interest at all? It seems that the seller will be happy to get the X$ : )

Thanks all!

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  • Zane McLaughlin
    Investor · Fayetteville, NC · Member since 2016 · 64 posts · 36 votes
    10y

    Hi @Oron Subayi,

    You are right in the fact that it is not a traditional loan. The seller, can sell you the house, through owner financing. The benefit to this is that you wont have to go through the hoops of getting a traditional loan through a bank, pay closing cost and all of the other things that come along with purchasing a house.  

    Essentially, the seller becomes the bank, and if you agree to buy the house on the agreed amount of $X, you would make mortgage payments to the seller at an interest rate that both of you agree to. Think of it as Leasing the property, but the monthly rent goes to paying the house off once all payments are made. Once you have made all of the payments the seller would sign the deed over to you in the same way the bank would. In these cases, you can agree to make a down payment, or not. You don't have to if both sides agree not to. This will make the monthly payments go up a bit (because you are borrowing more), but that can free up some of your out of pocket cash to fix the place up and put a renter in it to make passive income. You can google mortgage payment calculator, and then enter in Sale price, interest, estimated taxes, duration of loan, and it will spit out your expected monthly payments.

    Interest in these cases is good for the seller, because he can make more on the overall sale, and is more worth his while to do seller financing instead of taking a traditional loan. Since the seller isn't getting $X all at once, he needs a reason to take monthly payments.

    I love deals like these, and in my opinion, this is the best way to procure properties in order to make money off the rent that they produce. This strategy may not be advisable for fix and flip deals though.

    I hope this helps.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y

    Zane just explained a contract for deed which I don't advocate, the deed is executed after the payments are made.

    SF is done with a note and deed of trust or mortgage, the property is deeded to the buyer and then the seller takes a lien to secure the note.

    The note is funded by equity based on the sale price, not cash and these loans have different rules applied to them that don't apply to cash funded loans.

    Interest is due because you are using someone else's money (equity is the money to the seller). You can't rent a house for nothing, why think you can rent the use of money for nothing? The IRS will impute interest if you don't pay interest, that tags the seller with tax issues.

    BTW, when most sellers offering seller financing are also asking too much for the property, financing does not add value to real estate!

    You really need to see an attorney before biting off some seller financed deal your first time and get the property appraised! Good luck :)

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  • Oron Subayi
    OP
    San Diego, CA · Member since 2016 · 13 posts · 1 vote
    10y

    Thanks @Zane McLaughlin and @Bill Gulley

    Well I'm still in learning phase, and my questions were just after this part in Brandon's beginners course here in BP, and some googling

    As a beginner it is hard for me to extract the answers from yours, so I'll try to sum the answers according to my questions:

    1. So I'm correct - the loan is actually changing the note on the asset under the buyer's name

    2. This kind of deal is mainly for houses that need no\minor rehab or any other one time payment. And if the assets do need some treatment, I'll better save cash in my bank account for this

    3. Couldn't understand the answer to that question

    Just to be clear, I'm not talking about a situation where the seller want "seller financing" deal, hence the price is higher than usual

    I'm talking about a regular deal where the suggestion of "seller financing" is mine, and we already agreed about a price that both sides are happy with

    So after setting a price that both sided are happy with, why can't I use this method without an interest? The seller will still get the money he wants

    Thanks : )

    1Reply
  • Michael Lang
    Adamstown, MD · Member since 2016 · 11 posts · 1 vote
    10y
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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    10y

    Might read my comments here:  https://www.biggerpockets.com/forums/50/topics/355...

    My schedule is pretty packed this weekend in DFW, hit me up next week for more :)

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  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    10y

    Intetest is simply the rent rate of money or equity.

    If the seller is willing to let you use it for free, that's they're choice. None of us know why someone would do that is all. 

    Going from an agreed upon price, to SF. To SF with no interest?

    Ask the seller and let us know what is said, Oron.

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