Seller Financing: Benefits & Drawbacks Investors Should Know

Seller financing, put simply, is the seller giving the buyer a loan for property the seller owns. Seller financing is a great way to purchase properties if you can’t get a loan and also sell properties at the end of your investing career. It can be a win-win.

Benefits to Buyer

Contrary to popular belief, it can be very difficult to get loans if you’re just starting out in real estate investing. So how are some investors able to do it? They start out with a lot of cash, have very high income or they use seller financing. If you’re like most people and the first two options aren’t likely in the near future, then you’re left with seller financing.

The biggest benefit of seller financing is not having to abide by the standards and rules of financial institutions. You can buy as many seller financed properties as you want if sellers are wiling to give you a loan. Unlike with traditional financing, everything — including the interest rate, down payment and terms — is negotiable. There are no hard and fast rules, so you can do whatever you want.

Benefits to Seller

The first question everyone asks is, “Why would a seller want to use seller financing? What do they get out of it?”

The major benefit for sellers is retirement. Let’s say you invested for years, the property is paid off and you’re tired of managing tenants and paying for repairs. If you were to sell the property like most retirees do, you would be left with a lump sum a little less than the sales prices and have to budget that throughout your retirement.

What if instead you sold the property with a seller financed loan at 5% for 30 years? While you would not have access to all of the money right away, the 5% interest compounded over 30 years you would double what you made off of the same property. And you get a check for 30 years. The buyer takes on all of the responsibilities.

You might be thinking, why doesn’t the seller just reinvest the money into more properties? While that would yield more in the long term, the people willing to do seller financing aren’t thinking about the long term. They are thinking about reaping the rewards now.

The main reason seller financing doesn’t happen very often is because most sellers don’t know they can do it. Most real estate agents don’t know how to do it. If you can find sellers and introduce them to the idea of getting more money, you’ll significantly increase your ability to buy properties and help sellers. Win-win.

Drawbacks of Seller Financing

If the buyers use a “land sales contract,” the buyer has an interest in the property and does not get the deed until the contract is paid in full. If the buyer doesn’t pay it off or stops making payments, the seller gets the property back and keeps all of the money paid by the buyer.

If the buyer doesn’t take care of your property, the seller will likely have to go to court to force them to maintain the property or foreclose on it.

Depending on how the contract is written, the buyer may not be allowed to pay off the loan early.

Things to Think About

If this is the route you want to take, make sure you hire an attorney who focuses on real estate to draft the contract. You want to make sure you understand all of the laws in your state regarding seller financing and have the contract written to reflect your best interest.

Just because seller financing is possible doesn’t mean it’s going to be easy. Sellers are taking a big risk on you and will usually want higher interest rates than what’s available with traditional loans. They will check your credit and hire a lawyer to look over the contract or draft their own. If you have bad credit or low income, most sellers won’t take the chance.

How to Find Seller Financed Deals

To get into seller financing, you have to find sellers willing to do it. Most properties listed for sale with a real estate agent will not have seller financing as an option. But it doesn’t hurt to ask. I’ve had many sellers agree to it if the down payment was large enough and the buyers had good credit.

If you know exactly what you are looking for in an investment, I suggest you send that criteria to a local title company and ask them to get you the names, addresses and phone numbers of everyone in your area who owns that type of property outright. This is usually a free service. All you have to do then is get in contact with those people and see if they are willing to have a conversation about owner financing. That’s it.

Investors: Have you used seller financing to fund your deals before?

Let me know with a comment!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.