Seller financing? How does it work?

Question

Hello community, I am currently working on acquiring my first deal outside of my current bank financed home. Newbie questions

1) I just finished rehab and refi on my current home and pulled 60k. What i didnt realize is that I cant physically move for 12 months because I went 80% ltv. My original plan was to 3.5% FHA on a multifam fixer. How would some of you suggest I use this money for the next 12 months so its not just sitting in an account not making anything!

2) How do some of you get a seller to carry a note and do a seller finance situation? Like whats in it for them to want to do something like that?

Spencer Cornelia · Answer

@Luke Dilorenzo It's up to you to share the benefits of seller financing to the seller. There is an endless amount of paths you can take with offer, terms, rates, etc.

"Like whats in it for them to want to do something like that?"
There are a myriad of reasons - their house isn't selling, they don't need the cash today, they're fine keeping the note in their name and having you make the monthly payments + cash number, they don't want the tax hit if they've seen a lot of appreciation, they don't have the funds to rehab the house so they can't sell the place anyway, I could go on for days.

The reason benefit is the same benefit that you and I are going after: we're trying to do what's best for us. If you can present a win-win scenario for the seller, then why wouldn't he accept your offer?!?

My first 4plex deal was a seller financed deal found off market. You can read it here:
https://www.biggerpockets.com/forums/223/topics/646426-how-i-bought-a-seller-financed-4plex-in-las-vegas-part-3

In my case, the seller had taken a year off work or so and wanted the $1,500 in monthly income. He told me that he doesn't like having a lot of cash on hand, that he would rather have it invested somewhere. He was excited for 6.5% interest aka rate of return on his money. And if I stopped paying, he had all of my down payment and monthly payments and the asset back!

Todd Murphy · Answer

@Michel Torres your ARV will give you some direction here. It sounds like rough situation with purchase price and that you are brrrr'ing the property.

Ensure that your contract is air-tight. No early pre-paymemt penalty, defined interest rate on that purchase price after down payment and how it is amortized. Cover all rights to you the buyer for resale if you choose to inside the 5 year balloon. Find a good title company that will do proper due diligence on title and property tax search.

You also want to look at the rental component of the deal to ensure you won't have a dead stick property that sits vacant. The rental demographic will drive your rehab and finishes to ensure you can maximize rents.

The HELOC will be short-term to refinance, so make sure you run that interest only in your numbers properly.

Good luck and would love to hear how it turns out.

Todd Murphy · Answer

@Luke Dilorenzo finding a seller's need(s) are the real way to creating a deal. I am under-contract on second seller finance deal.

Get to know the seller by taking a genuine interest in how it can be a win-win for everyone.

Todd Murphy · Answer

@Jacklin Jackson there is not a typical term. We are in value-add projects that we will refinance out as soon as possible.

Stabilization and bringing NOI up in first 24 months is key to our projects.

We have 36 month terms largely based on seller's wants and needs.

Will Barnard · Answer

Yes, but I recommend you have that attorney in place prior, have had a conversation with him or her about the potential situation prior to so you know what it will take and what it will cost to produce said documentation. These docs should include a deed of trust (or mortgage if in a mortgage state), promissory note, and any other pertinent terms and potential riders that will or may be necessary such as a balloon rider, personal guarantee rider, etc.

The document should be simple and not too complex as to not scare the seller off or make it difficult to understand but it should have all the needed terms to protect both parties. A savvy seller will likely want to use their own docs produced by their own lawyer, but if you do it, make sure you protect the seller and not just yourself, the last thing you want to do is become a moral hazard!

Will Barnard · Answer

Are you interested in flipping some properties or buy and hold only? In either case, you can use those funds to put down on your next purchase so, as you stated, they are not sitting around earning you nothing.

As for seller financing, there are tons of reasons for a seller to do this. They can charge a higher interest rate than a typical conventional loan, they can loan to borrowers you may not otherwise qualify for a traditional loan, they can create cash flow by carrying the note, they can differ taxes by carrying a note, etc. It is a great way to purchase for investors so if you can locate a deal with a seller willing to finance, you can negotiate on a number of different levels to acquire the property that way.

Michel Torres · Answer

@Todd Murphy thank you for your input. I’ve searched around and found that rents in the area will range from $550-$625 for a 2/1. I will definitely look more into the property and will cover all bases before moving forward.

Michel Torres · Answer

@Todd Murphy I’m currently looking at a property where the seller is open to seller financing. The property is selling at $21,900, the seller wants $250/month, $3k down minimum, and a balloon note after 5 years. I originally was going to use a HELOC to purchase and renovate the property but would it be a good deal to use seller financing to get into the property then HELOC to renovate then refinance to pay the seller back and the amount I used. I’m trying to weigh out what would be the benefit of using taking their deal versus using my HELOC for the entire BRRRR. Thank you.

Will Barnard · Answer

No way to answer that as one size does not fit all. Every situation and property is different as is each individual investor's plans and investment strategies. For a property that is a potential rehab flip, if I was typically paying 10% interest from my private money lenders but could work out a 6-8% rate with the seller, I would be happy and he/she should be happy as that rate is much higher than a traditional mortgage. SO basically somewhere in between what you would typically pay in a conventional loan situation vs a hard money or private money loan rate.

Jacklin Jackson · Answer

@Todd Murphy how long of a term are typical seller finance options?

Seller financing? How does it work?

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