How Does Seller Financing Work? Two Inspiring Stories.

Seller financing is when, instead of getting a loan from a bank, the buyer gets a loan from the seller for the purchase.

Seller financing is often structured like a traditional residential mortgage except the seller plays the role of “the bank” and receives monthly payments of interest and principal from the buyer along, in most cases, with some form of down payment. In the event that the borrower fails to make the payments, the seller can foreclose and claim the collateral, usually the property on which the loan was made, much as the bank would have.

In the case of seller financing, the buyer and seller will execute a promissory note providing an interest rate, repayment schedule, and consequences of default. The buyer will send the monthly mortgage payments to the seller until the loan is paid off.

Seller financing is common where conventional mortgages are hard to come by. Sometimes this is because of a down market and sometimes this is because of the unusual nature of the asset class or particularities of the property. Seller financing allows you to be flexible and find win-win situations.

Our story of seller financing:

Our mobile home park was purchased through seller financing. It was a $600,000 purchase from an older seller who was wanting to get the property sold quickly.

The down payment was quite high - 47% and the loan is only for 5 years. The price was incredibly good for the type of asset, so it made sense to us as buyers to go this route.

For the seller, it made sense too. A buyer would have a very hard time getting a loan on his property. In general, commercial loans under $1,000,000 are challenging to get. Also, this property was in really bad shape - only about 1/3 occupied and needing a lot of work. Commercial lenders generally prefer to finance stabilized properties (90%+ occupied). It would have been tough to get this deal financed. We saw the diamond in the rough and went for it though.

It was a win-win for all.

Here's another inspiring story: 

I recently interviewed Lanisha Stubbs, a real estate investor and broker here in Los Angeles, who makes frequent use of seller financing. She shared with me one great example of a time she used seller financing.

While walking through her neighborhood, she discovered a pretty run-down 4-plex occupied by a man and his cousin. They had inherited this 4-unit building in Los Angeles and owned it outright, so they had 100% equity in the building. They were stuck though. The building was in terrible condition. They lived in one dingy unit, the other three units were practically uninhabitable. They were not working, so unable to get a refinance on the property, and they did not have the cash to fix it up.

She recognized they had a problem and she could help them fix it. She offered to become 50/50 owners with them on the property. In exchange for her 50% stake, she would pay to have the property fixed up. She was able to get financing for the remodel with no money down and fixed up the other units -- while these men stayed living on the property and still had a home.

As the units are fixed up, they are being rented. After her costs to fix up the units are paid back, she will share the rental profits with the owners/now her partners. Now, these men have a property that is worth 3 times what it was before, they are receiving income, and they live in a fixed-up unit. Lanisha is the 50% owner of a four-plex now worth $1.3 million, receives monthly rental income, and accomplished all of this with no money out of her own pocket.

That's pretty awesome!