What are the downside of seller financing?

Question

My seller is retiring and willing to seller finance for great rates.

What are the downsides?

Can I take out commercial equity line of credit on seller financed property?

Rich Weese · Answer

I have used seller financing from both a buyers position and a seller's position! I started in real estate without very much in the way of money but I had a lot of time and was gaining knowledge quickly. I would look for a seller that  owned the property free and clear. He might not even be advertising it as seller finance. I would meet with him and ask what he planned on using the money for? If the answer is that he was just putting it in the bank, I would explain how he could be secured by making the loan to me and collect higher interest on his money.

I would also offer him one other tidbit that worked in numerous situations. An astute seller might not want to carry a note for a long period of time in fear of an emergency that might come up. I would offer him multiple notes secured by one trust  deed on the property. It might have been an aggregate of $100,000 with five $20,000 notes all with different balloon dates. If he got in trouble or had an emergency, he would likely be able to sell one note at a smaller discount then he would be facing if he sold the entire $100,000 note.

Recently, I've been in the sellers shoes. I have been selling off free and clear single-family residences and carrying the financing. I don't have needs for the cash so I know it works fine for me. A buyer normally is willing to pay a higher interest rate since they may be looking for owner financing due to difficulty qualifying with a institutional lender.I have obtained a much higher interest rate than what I would receive in any bank.

I have also used the same process with a buyer by giving him multiple notes with each secured by its own mortgage.

Account Closed · Answer

@Rich Weese  Great strategy, i don't think I've heard that one before but definitely can over come objection in a certain scenario!

Rich Weese · Answer

@Mike Taravella

I think your question is a good one about needing to own the house free and clear. I would think you could still do it as an all-inclusive note and trust Deed or as a subject to or create a second mortgage to go behind the current financing. I think any of those should be okay but I am not giving legal or accounting advice.

I don't see any reason you would need to have a separate LLC and anyone is okay with carrying a note. It happens all the time and every day.

Good luck

Account Closed

Thank you Jack. Where is Friendswood Texas?

Derek Dombeck · Answer

If you want to attach a line of credit to the property later, the bank will probably not issue the loan without being in 1st lien position. At that time, you could ask your seller to subordinate to a 2nd lien position. Obviously, they could say no.

What I like to do, is after making payments to the seller for 6-24 months, approach them and ask if they would be willing to discount my loan balance if I pay them off early. If they say no, nothing changes. I just keep paying as agreed. The beauty of seller financing, is it's easy to have a conversation with them after you build trust by making on time payments. And if THEIR life changes to the degree of needing a chunk of cash, they can and often will approach you with an offer to discount if you payoff early.

Happy Investing

Derek Dombeck

Josh Caldwell · Answer

The answer depends on how YOU structure this deal. Seller finance isn't one thing, it is a series of techniques.

As a buyer, I may want to take title, if I do that I can pull equity in a refi.  I may also want to avoid taking title if there is little to no equity here.

The only potential down side to seller financing is that you might overpay, but to be honest, the price is irrelevant to me if the monthly payment is low enough.  The reason for that is that my tenant pays me more every month than I pay out, so I am just collecting a spread.

What sort of deal have you worked out?

Account Closed · Answer

@Rich Weese  Just south of Houston.  We moved from League City two weeks ago because they have a great school district here.  Hopefully no moves for the foreseeable future!  Its an awesome market here aside from being a great place to live :)

Rich Weese · Answer

I was just curious. I will be in the Dallas area for a couple of days beginning April 10 and I always look for someone to go to lunch or dinner with!

Mike Taravella · Answer

Hey @Rich Weese

I am interested in eventually selling my house but own the financing but have the following questions:

Do you need to own the house free and clear?

Do you need to have any license or have a separate LLC to be the financing piece?

Thanks in advance!

What are the downside of seller financing?

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