Why does seller financing not work anymore?

[Marcus Auerbach]

I get the question about seller financing quite a bit from new investors (I want to buy a deal 25% below FMV in Milwaukee and with seller financing... ahm, okay, let's talk about that). Found this chart and to me this pretty much explains why seller financing became so unattractive to both parties. Look at 1980! Why would a seller take the risk to work with a buyer a bank would not touch for such a small reward? And why would a buyer pay more if bank money is so cheap?

What are your thoughts? Have you done a seller financed deal?

[James Allen]

Marcus, I've done three seller financing deals, and looking at your numbers in the above scenario, I would  tend to agree. However, I'm not sure that doing a straight up Seller Finance "Investment deal" is apples to apples with the "owner occupied" rates that you are providing above. Most of the investment rates that I've seen over the past few years were over 5%. The banks also ask for 25% down on most of the deals. I'll give you an example on a triplex that I purchased not too long ago. 

I won't name the bank, but the price of the triplex was $90,000.00 after negotiations. The bank wanted to do a 15 year loan with 25% down and an interest rate of 5.65%. They also wanted upfront points. This was going to put the down payment at $22,500, plus points. If you add the two points in on the front end because of the small loan amount, the total down before additional closing costs were $23,850. The payment at that point was going to be $557 per month. This really was similar to other bank offers that I was receiving so it wasn't an outlier.

I spoke to the owner for about two hours discussing what his goals were. He really needed $30,000 to pay off some of his bills because of his age. He also had some other goals in mind. The deal that we ended up working out is below.

As you can see by the image above, my initial mortgage payment was $210 per month versus the $557 per month that I was going to pay with the bank. I do realize that I paid an additional 5% down, but I didn't pay points and I already knew I was planning to repair the property as soon as possible and my main goal was to do a refinance as soon as the property was ready to go.

I have since refinanced the property, at a new value, and pulled almost my entire down payment back out. 

I do believe there is a time and a place for seller financing. Creating a deal that works for everyone is key. The seller was happy that he was still collecting some income every month and I was happy that I didn't have to pay points or go through all of the waiting normally done with a bank. I closed that deal within 2 1/2 weeks of my offer.