Seller Financing Real Estate - The Alternative to Traditional Financing
Seller
financing real estate is a great way to get around using traditional
financing.
That is why seller financing is part of the "Buy Low" portion of the
real estate cycle. When traditional financing is difficult to obtain,
financing provided by the seller (also called owner financing) is a
great alternative.
Let's
go back in time a little bit to show you why this is so valuable. Back
in the 80s, there was much more going on than leg warmers and big hair.
Interest rates in the United States had risen to historic highs (around
16-18%). With interest rates this high, people could not afford the
payments associated with buying a home at this time. Since people could
not make these kinds of payments, lenders could not give
loans.
So,
in order for people to be able to buy and sell during these times,
people used other financing methods to accomplish this. Seller
financing real estate was one of the main techniques that was used
during this
time. Why? Because of
the flexibility provided by this technique.
People were able to structure the interest rate, payments, and other
terms of the loan at mutually acceptable levels. It was a true win-win
for both the seller and the buyer.
The seller would receive a
monthly payment from the buyer. This payment would have interest and it
was a higher interest rate than the seller could get in a CD or money
market account.
The buyer would be able to afford a home and
not have to go through the traditional lenders. This allowed real
estate deals to be done.
With this background, that is
why
seller financing real estate is so valuable to us as an investor. There
are times
that we run into deals that would be profitable if we did not have to
go through traditional lenders and all of the fees that they charge.
Seller financing is a very powerful alternative.
When negotiating a seller financing real estate deal, the terms of the
loan need to
be mutually agreed upon in writing. Those terms are:
- Length of loan
- Loan amount
- Interest rate
- Payment amount
- Amortized or interest-only
- Balloon payment (if necessary)
For example, let's say that you are working a deal where you are going to ask the seller to carry the financing and you knew that you could only afford a $900 payment for the deal to be profitable. You could tell the seller, I need a $900 payment so we can adjust the loan amount and interest rate to be something that is acceptable for you.
Why would a seller agree to carry the financing? They will make more money selling this way because of the interest attached to the loan. They will be able to receive monthly payments that can add to their income. They will also be able to sell their home when it might be difficult to do so otherwise.
When you structure a seller financing real estate deal the right way, it is a win-win for everyone.
Once thing that is very important is that we want to get into the deal for as little of a down payment as possible. Since our ROI (Return On Investment) is calculated by taking the money made and dividing by the money invested, our returns will be higher by investing less money into the deal. In other words, we get to take advantage of as much leverage as possible.
When it comes to closing the deal, it is important to have a closing agent that is familiar with owner financing. They will be able to help you structure the deal using a land contract (or whatever form is used in your state) to avoid the due on sale clause if there is an existing loan on the property. Talk to the closing agent about ways to avoid this legally.
Keep in mind the important thing: Seller financing real estate provides us an alternative to traditional financing. There are times in the real estate cycle that traditional financing is not easy to obtain and we need an alternate method of buying properties. This technique fills that gap and makes it possible.
