Traditional Financing not working, Consider Seller Financing

2022, the year where you plan to grow your real estate portfolio and start rolling in passive income.

Wait, banks typically want 20-25% down on every non owner-occupied investment property? What if you don’t have much cash on hand?

You can turn to seller financing, one of the oldest methods of “creative financing”.

Knowing how to use seller financing can help you get more deals, for less money and less hassle than going through the bank.

Here’s what you need to know about seller financing, including the advantages, disadvantages, and how you can pitch it to the seller.

What is Seller Financing?‍

Seller financing is a type of real estate agreement where the seller agrees to act as the buyer’s lender.

This allows the buyer to forgo the traditional mortgage process and terms. Instead of applying for a loan with a bank, the buyer signs a financing agreement with the seller.‍

The Logistics of Seller Financing‍

The seller won’t provide you with actual money to pay for the property like a bank does when they underwrite a loan.

Rather, the seller will extend credit to you and allow you to pay for the purchase of the property over time.
The awesome thing about seller financing is all terms are negotiable including the down payment.

While the seller will likely request some type of proof that indicates you can pay for the home, you won’t have to supply nearly as much documentation as you would for a bank loan.

Your financing terms can vary, but most seller financing agreements require you to pay the full amount that you owe within five to ten years of buying the property.

This doesn’t mean that your payments are calculated using this short financing term. Instead, it’s customary to amortize the payments over a 30-year period.

Even though you have to pay off the seller financing agreement in 5-10 years, your payments are calculated as if the agreement is for 30 years.

Unlike a conventional mortgage, seller financing agreements rarely last for 15, 20, or even 30 years.

When your seller financing period ends, you can pay the remaining balance with cash or you can apply for a conventional bank mortgage to pay the agreement in full.

As the buyer, you will sign a promissory note that states the details of your seller financing agreement, including the interest rate, repayment schedule (including the amount of your payments and the agreement’s term), and what happens if you default on the agreement.

‍Advantages of Seller Financing‍

Seller financing is a significantly quicker process than applying for a conventional bank loan.

There are no credit requirements, allowing people who may not be approved for a bank loan to purchase the property.

Investors with a couple of properties under their belt can quickly hit the maximum amount a bank will loan them. A seller financing agreement is a good option for buyers who are likely to be denied for a traditional bank loan.

There are no typical closing costs associated with seller financing, and you don’t have to set up an appraisal.

If the property needs a lot of repairs, banks may not be willing to underwrite a mortgage on the home unless these repairs are completed. Meanwhile, investors know that homes in need of repairs offer the best deals.‍

Drawbacks to Seller Financing‍

Since the seller is providing an additional service, you may have to pay more for a property when you buy it with seller financing.

Most homeowners aren’t familiar with this type of financing so it’s often your job to educate them and make them feel comfortable with the process.

Seller financing may not be an option if the seller doesn’t own the home outright.

If the seller has a mortgage, their lender may require them to pay the entirety of their loan when they sell the home, known as the “due on sale” clause. Otherwise, the bank can foreclose on the property because the seller violated the loan terms.‍

How to Propose Seller Financing‍

Some sellers will indicate that they’re open to seller financing in the property’s listing.

However, even if the property listing doesn’t mention seller financing, you can still include it with your offer for the property.

Be specific with your proposed terms for seller financing so that the seller understands why it can help them to act as your lender.

For example, your offer might state the following terms:

• - Full asking price for the property
• - A 5 percent down payment (this provides the seller with immediate cash)
• - Seller financing for the remaining amount at a 5 percent interest rate
• - Remaining amount amortized as a 30-year loan with a balloon payment for the        remaining loan balance due in 5 years

In your offer, you want to sell seller financing as a profitable option to the seller.

You can suggest creative terms for the financing agreement to entice the seller.

One alternative is to offer a slightly higher interest rate for each year of the seller financing agreement.

If the seller agrees to your offer, you’ll want to hire a real estate attorney to draft a formal promissory note and sales contract.‍

The Bottom Line‍

A traditional mortgage isn’t your only alternative for financing an investment property. Seller financing makes it quicker and easier for buyers to purchase a property without applying for a bank loan.

Some sellers may be open to seller financing when they realize it can be a profitable way to sell their property. So don’t be shy, offer away.