Answers to questions about seller financing.

[jrmartin]

Hello all, I signed up for the forum after checking it out yesterday and see that there are a lot of members who seem to have questions regarding seller financing. This is about 50% of my business so I thought I would start a thread to try and help to the best of my ability.

Please note: this is a subject that I have a lot of knowledge in, however, I am not an attorney and for concrete answers to anything you should consult a local attorney in your area.

Let me know what you guys need.

John

 

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[andviv]

Scenario 1:
Assume there is an investor, Joe, who's got $100K to invest and it is tired of getting 0.5% interest on his money with his bank. He's looking for passive income. Joe heard that jrmartin could help him get better returns and contacts him, so jrmartin says: ...

Scenario 2:
Andrew has bad credit, he lost his house in foreclosure and he wants to buy a property, he's got a job and could buy if banks would agree to give him a loan, but that is not happening these days. How could he get to buy a house these days?

 

[jrmartin]

Please note that these are scenarios here in Florida and while they work here, they might be different in other areas.

Scenario 1:
Joe has several options available to him, all of which are better than leaving the money in a savings account as long as its not overextending him.

1. Because Joe has a decent amount of cash on hand, he can purchase a property either from an auction scenario or from a banks REO inventory. Doing so should allow him to purchase for between 25-30% below market value with minimal repairs needed. From here Joe has three options:

He can flip the property
He can rent it out
He can seller finance the property

Flipping the property is just selling it on the open market. Everyone here knows how a house is sold so its pretty self explanitory. The nice thing about this option is the ability to do this several times a year with the same 100K

Renting it out is the same. Everyone knows how a rental works and the passive income involved. The benefit to this is property appriciation and decent rental income. The drawbacks are bad renters, maintanance, and possible home damage. If Joe has decent credit, he can leverage his 100K with his bank though and turn this into several cash flowing rentals with some reserves left. If you spread these out you have the benefit of a little rental income from 2-3 if you have 1-2 that are sitting vacant.

The third option and one thats becoming more popular these days as people are having more and more trouble getting financing is to offer the financing yourself. The benefit is a larger down payment (usually 10-20% of the final purchase price), a nice interest rate (anywhere between 6.5-10%) and a very good option price at the end of the contract.

You can also offer seller financing on homes that you have leveraged through a bank but I can not stress enough how important it is not to over leverage yourself.

2. Andrew is either going to have to come up with a decent down payment and find someone who is offering to finance the property themselves or rent for a couple more years from the guy who took option two above and work on his credit.

If he decides to find someone offering seller financing he needs to realize he is going to have to come up with a down payment of at least 10%. Down here at the foreclosure process can take up to 2-3 years before the banks get someone out of their house. If Andrew truely has a decent job and has not made a mortgage or rent payment for several years than he should have no problem coming up with a down payment. If Andrew claims to make $50,000 a year, hasnt made a mortgage payment in years and doesnt have 10K in the bank, something is wrong and it throws up a red flag. If he has a down payment and takes the financing he can expect to pay a higher interest rate than a traditional bank would offer but usually the payment with taxes and insurance figured in tend to be within 10% of what rental rates are here. This allows Andrew to take advantage of the market now before it sees any real growth with the same amount he will already be paying in rent. Unless your a foreign national, seller financing should only be a short term solution for you. Andrew should attempt to refinance the loan with a bank as soon as he can as the interest rate will decrease his payment. He can then invest the additional monthly money he has been paying against the principle of the loan.