Buying using Seller Financing
by James Miller
When I first started Investing in Real Estate I remember wondering why seller financing was such a big deal. It seemed as though every guru out there was talking about how the best deals come with some sort of seller financing.
To me it seemed like it would just be a hassle. Even though I was starting out, I had good credit and enough cash for a down payment. Surely any deal that I could get with seller financing, I could get for cheaper if I cashed out the seller by getting a loan.
I started out buying rental properties. It didn’t take me too long to figure out that if I was just going to buy one or two properties, using my cash and my credit probably wouldn’t make too much difference, but if I wanted to get A LOT of property under my belt, then going to the bank and putting down 20% every time was going to quickly get very expensive. I couldn’t keep coming up with 20% down payments without limiting how fast or how much I could buy.
Every time I got a loan for a property it would affect my credit score. It also threw off my debt to income ratios, as the bank only credits income from income property at 75% of what you actually get in. It seemed like it would take a long time to get back the $23,000 I put down as a down payment at $100 net rental income per month. Some months repairs were needed , so I didn’t even get that much, or worse, had to take money out of my pocket to pay for them.
I also learned that just because a seller is open to offering some sort of financing, doesn’t automatically make it a great deal. Most of the time my initial assumption was correct, I could get a better price by just offering cash, but sometimes seller financing terms can make the deal. What it comes down to can be summed up by this statement:
Good seller financing should allow you to use less money, and less credit than you would be able to otherwise.
I found that while I may pay a small premium in price, if I am diligent in my shopping, I can still get a great deal by using land contracts, and seller seconds. Many times sellers are so stuck on their price that they fail to think of the time value of money. With other sellers I think it becomes a matter of pride taht they have to get the price they have decided on. They get stuck on “I need to make $10,000 on this place”, or start thinking “I won’t take any less than $100,000”. I hate to admit it, but we men can be particularly bad this way.As sort of an example I also have to tell you about a deal one of my partners just landed. She negotiated a purchase price of $47,000 on a three bedroom one bath riverfront home on two acres, with terms of $20,000 down and the seller holding a no interest, no payment mortgage for the balance.
Now this is a fixer upper, but besides getting a great price, she was also able to get great terms. Yes there is a need for a $20,000 down payment, but at less than 50% LTV you can get almost any hard money lender to give you a loan on it. Her exit was to assign the contract for $8,500. sounds like hefty price, but the woman she assigned it to was savvy enough to see that there was a ton of room for her to make money in the deal and look past the $8500 check she wrote. She will need to put a little bit of money into the place, but after repairs it will be worth around $120,000. (Yes, even in today’s market).
It may not be as clear in this example, but my partner set up a deal that was easy to finance. No matter what your credit looks like you can almost certainly find someone to loan you 50 cents on the dollar.
Could she have shaved off a few thousand more by offering all cash?
Probably. but the terms more than made up for it. An all cash offer would have made it just like any other deal. The price would have still been good, but the deal wouldn’t have that edge, that advantage that all investors are looking for.
The exit she used out of the deal brings me to this point:
Great seller financing allows you to use little or no money and none of your credit.
She had put down $10 as an earnest money deposit on her offer to the seller. That was all that she had at risk. Had she not found a buyer for the contract right away she could have dropped her price, decide to purchase it herself and do the rehab, or let the contract go. Unless she decided to buy the property, her downside was very limited. Her position involved none of her credit and very little of her money.
In real estate terms, I consider $10 as “no money”, but I want to be accurate in my reporting of the events.
Please understand the $10 wasn’t really part of the financing, but it correlates to the idea that the less you have in a deal at any one point, the less risk you have. Would that seller just as easily taken $100 or $1000 for an earnest money deposit? You bet, but my partner had the nerve to not be uncomfortable asking them to take less to secure the contract. She instead focused on getting the sellers a deal that would work for them and treated the earnest money as a secondary concern.
The nice part about the way she set up the deal was that by taking back a mortgage, the seller still had a hand in the deal. This always makes me feel a little better as it shows me that the seller probably isn’t hiding anything.
Buying homes “subject to” the existing financing is one of the best ways to get into a property without using your money or credit. The sellers name stays on the mortgage until sometime in the future. These sellers often times have little or no equity, so you can usually get by without putting any money into the deal outside of minimal closing costs. I have even taken over properties “subject to” where the seller comes to the table with money and pays me to take the property. It’s nice when your credit is not at risk and you get money at the closing.
If you are new to real estate investing some of these deals may sound far fetched, but I can assure you they are out there. I have done them. It just takes more time searching for them than most would like to spend.
Buying using seller financing