The Definitive Guide to Using Seller Financing to Buy Real Estate￼
Seller financing is one of the most common methods that people use to invest with little or no money down. It is an old method, but its popularity has been declining over the years recently. However, it is still a good method as you will see in this chapter. As the name suggests, seller financing is where the financing comes from the seller.
The person selling you the property takes the role of the bank. When the legal ownership is transferred to you, you send the payments directly to the seller instead of the bank. After agreeing on the price, the seller will ask for a down payment and set an interest rate on the remaining amount, duration of payment and the monthly amount you will be paying him.
The “due on sale clause” is the biggest downside of seller financing. It is a part of just about every mortgage. It gives a bank legal rights to demand for the full loan payment at once, if the home is sold. Therefore, if the seller has an existing mortgage, seller financing may not work. However, this clause only gives a bank the right, but the bank may decide not to demand the payment and they might even agree with the arrangement. The best option is to just find a free-and-clear owned property.
The Benefits of Seller Financing
Ease of financing: seller financing spares you the trouble of using a bank—which is great for people who cannot get a mortgage.
Low or no down payment: depending on how you negotiate with the property owner, you may end up putting very little or nothing down.
Creativity option in structuring the deal: seller financing leaves room for creativity, unlike banks which have rigid rules. You can negotiate practically everything and end up with an awesome deal.
Buy “un-financeable” property: when a property is in very poor condition, you may be unable to get traditional financing. In this case, seller financing comes in handy.
Will not appear on your credit report: it is highly unlikely that a seller would sign up with a credit reporting agency to report the debt. Many sellers would prefer monthly payments over a long period of time instead of one large check. Here are some of the reasons which would make sellers opt for seller financing.
- Monthly income
- Better ROI
- Spread out taxes
- Lack of an alternative selling option
If the seller does not own the property free-and-clear, he or she can finance a fraction of the deal and the other part will be financed by a traditional lender. There are three easy ways to get seller financed deals:
- Direct mail
- Look for keywords on websites
DrawBacks and Risks
There are three major concerns associated with the seller financing method:
- The due on sale clause
- Higher interest rates
- Fewer potential properties
Seller financing allows you to acquire properties without using bank services. However, this is no reason to overpay for houses. Make sure you get a great deal.
If you have ventured into real estate investing, that is one of the best decisions you have ever made so far. Many people, some of them your friends and family, may never make such a decision and take charge of their financial fate. However, since you have chosen this path, you now hold great power; and you have heard, “with great power comes great responsibility”. You may not feel successful now and there is no problem with that. The habits discussed below will make you a successful investor if you apply them.
One of your greatest responsibilities as an investor in real estate is to be an effective manager of your portfolio. It does not matter whether you manage your own property, or you have hired a property manager, you are a manager. Owning rental property is never a walk in the park. There are many issues that you may have to encounter such as bad property managers, bad employees, economic depressions, natural disasters, among many others. Learn to properly manage your property and your finances.
Increasing your rental property income is another task. This does not just refer to increasing the rent. To accomplish this, you should always rent out your property at the market rate. You will lose out on a lot if you decide to offer below market rent. Renting too high may also be a problem. Vacancy is one of the main cash flow killers and you will experience it a lot if your rent is too expensive. This does not mean that you become a penny pincher. Your tenants also have a right to enjoy the property. However, you can cut costs in many ways. For instance:
- Transfer some utility payment responsibilities to the tenant (electricity, garbage, water)
- If your property tax bill is too high, challenge it
- Try getting better insurance rates
- Apply water-saving techniques
- Use energy efficient appliances
- Look for vendors who will offer lower rates for longer contracts
- Switch to fewer (but larger) garbage pick ups
- Also, don’t forget to compare insurance companies for your rentals.
These simple strategies will help reduce your expenses. They may appear minor but in the long run, they have huge financial benefits. A plan in real estate investing is crucial. Not having one is like driving aimlessly without a map across the country. Make sure you have a plan and a goal. If you already have one, carry it out. If possible, go back and check your goals everyday then monitor your progress every month. Your plan will not remain the same, it will keep changing as your career advances; and that is fine. Just follow through with it.
It does not matter the level of your success, you have a duty to give back. There are many ways to do this but try giving back financially and educationally. Share with others what your investing journey has taught you. Join a community of investors (from all levels) so you can all learn, share and grow as a family. Your story might make a change in someone’s life.