How to use Seller Financing: Investors Guide
Seller financing is the gold staple for real estate investors. It’s quite possible the best source of funding for a property.
Let’s dive in!
What is Seller Financing
Seller financing is a transaction where the property seller extends credit to the buyer to purchase the property. The buyer repays the loan over time, typically with interest, making the seller the lender. This alternative financing option eliminates the need for traditional bank mortgages.
Other names of seller finance
Seller financing goes by many names, each one a different door into the same room of opportunity. You might hear it referred to as:
– Owner financing
– Owner will carry (OWC)
– Owner carry-back
– Seller carry-back
– Creative financing
– Installment sale
– Terms sale
– Purchase-money mortgage
Each term echoes the same concept: the seller acts as the bank, providing financing directly to the buyer, allowing for more flexible arrangements than traditional mortgage lending paths.
How do Investors and Wholesalers use Seller Finance?
Wholesalers and investors can leverage seller financing as a creative strategy to close deals without traditional lending. They can negotiate terms directly with sellers to acquire properties, even if they lack immediate capital or financing. This method allows them to secure deals more quickly and often with less red tape than bank loans. By offering to take on the seller’s financing terms, wholesalers can then assign the contract to end-buyers for a profit, while investors can hold onto the properties, create cash flow, and build equity over time. Seller financing thus becomes a tool for facilitating deals that might otherwise be out of reach, providing a win-win solution for both buyer and seller.
ADVANCED: they can also SELL a seller-financed deal and we’ll get into that later!
Here’s a video explaining a seller finance contract an investor would use:
How does seller financing work?
Seller financing works by allowing investors to bypass traditional mortgage lenders, instead securing funding directly from the seller. The terms are negotiated one-on-one, offering flexibility in payment structures and interest rates. This direct line of credit can enable investors to snap up properties quickly, capitalizing on opportunities that might otherwise slip through the cracks.
Is seller financing worth it?
Absolutely! Seller financing can be a game-changer, offering more flexible terms than traditional loans and potentially quicker closings. It’s particularly worth it for investors looking to expand their portfolio where conventional financing may not be feasible or profitable. With the right property and motivated seller, it can open doors to deals that otherwise wouldn’t pencil out.
The best part is, it’s EXTREMELY flexible. You can negotiate the time of the loan, payments, interest rates, etc… ANYTHING is negotiable… AND you can even come back and renegotiate the terms of the loan years later if you need to…
Try doing that with a traditional bank!
Benefits to a seller
One of the biggest benefits to sellers opting for seller financing is the potential to defer capital gains taxes. Instead of a lump sum payment, sellers receive steady income and interest over time, which can positively impact their tax situation. Additionally, the financed asset becomes a valuable part of their estate, which they can choose to pass down or manage as a continuous income stream.
What are the disadvantages of owner financing?
The downsides of owner financing are few, especially from the buyer’s perspective. If structured correctly, there really aren’t any disadvantages to buying with seller financing—it offers flexibility in structuring payments and can often be tailored to suit the buyer’s financial situation. The main caution is ensuring that the terms are clear and beneficial to avoid potential complications down the line.
How to BUY a deal with seller financing
– Target properties with 100% equity for easier seller financing negotiations.
– Build trust with the seller; they need to see you as credible and reliable.
– Ask if the seller is open to receiving payments instead of a lump sum.
– If the seller is unsure, be ready to explain the benefits of seller financing.
– Exude confidence to reassure the seller of their financial security.
– Negotiate terms by either asking the seller’s preferences or proposing your own.
– A positive response from the seller means you proceed with a standard transaction, with them acting as the lender.
How to negotiate a seller-financed deal.
I think this can best be explained with this video here:
What makes a good Seller Financed deal
Understanding what makes a good seller-financed deal boils down to one key factor: the monthly payments must be to your advantage.
As an investor, this is your consistent outlay, so ensuring affordability is paramount for maintaining a healthy investment.
To accurately gauge a deal, don’t just subtract the mortgage from the rental income. True cash flow calculation includes all ownership costs — think maintenance, taxes, insurance, and vacancies. After tallying these, decide on your desired cash flow margin, which typically ranges from $100 to $400, but will vary by market.
Equally important is grasping what’s on the seller’s mind. They might prioritize a larger down payment for immediate financial needs, or they might be enticed by the prospect of earning interest. While the interest rate might seem less critical to you, since your monthly cash flow is the priority for your rental, it shouldn’t be dismissed. It’s all about balance: securing low enough payments to ensure profitability while meeting the seller’s needs, creating a symbiotic financial relationship.
Selling a seller-financed deal
So you have a deal locked up… what now?
Wholesaling a seller-financed deal.
Wholesaling a seller-financed deal is refreshingly straightforward: the process mirrors traditional assignment. The twist is in the details—ensure transparency by informing the homeowner about the transfer and introducing who will take over the payments. Clear communication is key to a seamless transaction and maintaining the trust essential in seller financing agreements.
Here’s a quick video explaining:
“Wrapping” a seller-financed deal
Wrapping a seller financed deal is like a masterstroke in creative real estate—the art of crafting a wrap mortgage. Essentially, you’re selling the property to someone else on seller financing terms, even as you’re still making payments to the original seller. This means you can secure a property and the cash flow it generates without the typical headaches of property maintenance.
You’re creating a financial sandwich, where you’re the filling between the original seller and your buyer, each with their own set of terms. It’s a sophisticated strategy that, done right, can lead to a steady stream of income. But caution and counsel are advised—partner with a real estate attorney to ensure that your contracts are airtight and your steps are legally sound. This level of due diligence is how you transform complexity into cash flow.
Selling a free-and-clear property with seller finance
Selling on seller finance can be a strategic exit for those holding free-and-clear properties. It’s essential to navigate this process with an understanding of the Dodd-Frank Act, which often requires involving a licensed mortgage originator to ensure compliance.
Here’s the upside to this approach:
– You’re relieved from the responsibility of property maintenance once the deal is closed.
– You receive a steady stream of income for the term of the loan, creating predictable cash flow.
– You create a ‘paper asset’ in the form of a promissory note, which can be traded, sold outright, or even used to sell partial payments — opening the door to the world of note investing.
Investors are using this strategy to maximize returns; they buy properties outright (typically with private funds) and then sell them via owner financing. This can potentially lock in an interest rate return that’s higher than current market rates, supercharging their investment yield. It’s a method that can turn bricks and mortar into a flowing stream of financial benefits.
How to find these seller finance deals
To unearth those coveted seller finance deals, you’ve got to be a bit of a deal detective, going directly to the source — the sellers. Here’s your quick guide to navigating the off-market terrain:
1. Pull a List of Probable Sellers: Tools like PropStream are gold mines for filtering out properties that are free and clear of mortgages — prime candidates for seller financing. You can also use ListSource to pinpoint these properties, but PropStream gives you the added advantage of layering niche criteria to refine your search.
2. Skip Trace: Once you’ve got your list, it’s time to find out who owns these potential goldmines. Skip tracing gives you the keys: names, phone numbers, and mailing addresses.
NOTE: here are some other tools and software for investors.
3. Reach Out: Armed with contact information, kick off your campaign. Send them direct mail that speaks to their potential needs and the benefits of seller financing. Then, pick up the phone and call them. It’s personal touches like these that can turn a cold lead into a warm handshake.
4. Rinse and Repeat: Persistence pays. Keep mailing, keep calling, and fine-tune your approach with each interaction. Seller financing deals rarely fall into your lap on the first try, so the mantra is: follow-up, follow-up, follow-up.
Your mission is to create that win-win scenario where the seller gets a hassle-free sale, and you secure a property with terms that traditional lenders can’t match.
Credibility for Seller Financing
Credibility is your currency in the seller financing realm. To convince a seller to consider financing your purchase, they need to trust you implicitly. Here’s how you can build that trust:
– Set Up a Professional Website: Your digital footprint can say a lot about your business acumen. Using platforms like Carrot or exploring top website builders for investors can give you a professional edge. Your website is your digital handshake; make it count.
– Exude Confidence: In negotiations, confidence can be as crucial as the terms themselves. Sellers are more likely to finance a buyer who seems assured and knowledgeable.
– Dress Appropriately: First impressions matter. Don’t overdo it with a three-piece suit when viewing a rural fixer-upper, but also don’t show up in sandals and shorts. Find that smart-casual sweet spot.
– Organize with a CRM: Juggling multiple sellers and properties requires organization. A CRM (Customer Relationship Management) system like InvestorFuse isn’t just about keeping contacts; it’s about having detailed notes and personal insights at your fingertips. Remember, confusing details or forgetting a conversation can be deal-breakers.
NOTE: see our guide on the top CRMs for investors.
Each of these tips is about crafting an image and a reality of professionalism and reliability — show a seller you’re serious and systematized, and they’re more likely to take a chance on you with seller financing.