Seller financing vs Regular sale

[Mike Neubauer]

I’ve been listening to Mitch Stephen’s podcast and seller financing seems like it’d be a good fit for our business. 

Can someone share their insight on the financials of carrying a note vs getting the big pay day now. 

It seems to make the most sense to delay the profit today and take it over a period of time, collecting cash flow. 

I am not limited by capital. I pay 6% for my capital. I figure I can seller finance between 6-10%. 

My typical profit on a fix and flip is $25-30k. I figure I will get the same sale price, but be able to cut out about $10k in closing costs and commissions if I do seller financing. 

Looking for reasons why one option is better than the other. 

[Ben Zimmerman]

I think that seller financing can be amazing on paper, but the reality tends to be less glamorous.

No home buyer accepts a seller financing deal at 10% interest as their Plan A when a bank would loan them the money at 4-5%. FHA loans only require a 3.5% down payment and have relatively low credit requirements such that the overwhelming majority of people should qualify for this loan product. The trick then, is to find someone financially stable enough to actually make the monthly payments, yet for some reason doesn't qualify for a loan of any kind.

Even if you do find someone that you think will be a good fit, one of two things will tend to happen in the next 1-5 years.  Either their financial situation will get worse, in which case now they are likely defaulting on the loan, or their situation stays the same / gets better, in which case now they are likely in a better situation to renegotiate with a bank and refinance out of your 10% interest loan.  

Seller financing is highly profitable as long as the buyer stays paying that high interest loan amount, but the natural way of things is that they will try to refinance with a bank as soon as they can which eliminates the rest of your profits. A 200k home at 3.5% down payment is roughly 1400/month at 4.75% interest with PMI, but is closer to 2k/month at 10% interest and no PMI. If a buyer could cut their mortgage by 600/month you better believe they will keep trying until they succeed, and when they do that is the end of your profit cycle.