Seller Financing Questions...

[chandabb]

I'm reading a book right now that keeps mentioning how seller financing is one of your best options to buy properties starting out in real estate investing...

I'm just wondering how seller financing works? Will the property be in your (the buyer's) name or will it remain in the seller's name until you've paid on whatever terms you agree to? Is the deed registered in your name when you purchase or does it stay in the seller's name?

How does it work when you sell the property since it seems to be an informal agreement? Would it still work the same way where you would obtain a payoff from the seller and the funds are wired into their account on the day of closing? Do you even have the right to sell without getting the OK from the seller first?

Are there certain types of properties in which seller financing may be the better option vs. something else? Meaning, is this something you might do for lower priced properties, but would definitely stay away from when you are getting into mid to upper class properties? Or is this better when dealing with FSBO vs. properties listed with an agent, etc?

It would make sense that this is an avenue to allow me to purchase a property but I guess I just don't feel I know enough to feel comfortable moving forward at this point.

Sorry for all of the questions everyone!

 

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[bflbob]

I've tried to do some seller financed deals in the past, but met with little luck. I'm mainly looking at smaller properties -- 4-10 units.

I find the seller wants a healthy rate, but doesn't want to (or can't ) finance a heavy percent of the property. I wasn't lucky enough to find someone who didn't already have a mortgage in place.

So, if I was looking at a $150,000 offer, the seller might be willing to cover $20,000. The problem is that the bank doesn't really want a 2nd mortgage on the property. They want you to come up with 15% - 30% in cash -- not via a loan.

So...the only way around that might be to take a loan on another asset, and use that for the down payment. Then have the bank loan you the remainder, and do a refi after a few months, taking on a 2nd from the bank and paying back your other loan. But that isn't seller financing.

Although I have never tried it, you might have some luck in creating an LLC where the seller is a limited partner. They take a 30% position in the LLC in return for a 30% down payment on the property. Then you could write an agreement that allowed them to sell their share back to the LLC down the road at refi time at an agreed price.

The bad thing for them is that this would limit their liability, but would not guarantee a return of the 30% since a lien could wipe out any value in the LLC. Since they are a partner, they would have rights that would fall below the lien holder.

What you are probably hoping for is an investor who is willing to finance nearly 100% of the existing value of the property, and that will be hard to find. I would think that on larger properties, this is even tougher. In those cases, you are more likely to find assumable financing.

SteveO or some of the other folks that deal with bigger properties might be able to help you there.

 

[chandabb]

What you are probably hoping for is an investor who is willing to finance nearly 100% of the existing value of the property, and that will be hard to find. I would think that on larger properties, this is even tougher. In those cases, you are more likely to find assumable financing.

Bob, you are right. The book was published in 2000 so maybe seller financing was much more common before the bubble burst. It is mentioned repeatedly through the book so I thought it'd be a good option. I was sure how you would go about the process though...

 

[Sparlin]

This may fall under a different definition, but I believe a lot of the Foreclosure/ Auction flippers do seller financing through "rent to own" deals. They have the properties paid off so there are no third parties involved. I've seen several signs around town and on Craigslist offering these types of deals.

 

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[MonTexan]

Both the buyer and the seller will have their name on title to the property. As I understand it, a title is kind of like a bundle of sticks...some parties have the right of beneficial use of the property (the buyer) while another party may have the right to foreclose (1st lien holder). The lender - banker, private money guy, free-and-clear owner - gets a promissory note and deed of trust to secure their interest. If the buyer fails to follow through, the lender forecloses.

I don't think any one subset of properties is best suited for an owner financing purchase or sale. ANY property can be a good candidate. I came very close to selling one of my rent houses on owner financing (see threads on Lonnie Deals) but the deal fell apart when the co-signer got cold feet.

Bottom line, as a SELLER you can really boost your returns with owner financing as opposed to just collecting rent checks, and as a BUYER you can often get into a property for little or no money down. I'd just be sure to use a title company or attorney to close any deals SOLD on owner financing to prevent someone from saying they were taken advantage of in the event you have to foreclose. Many courts these days will side with the "little guy" against the "big bad investor".

 

[bflbob]

This may fall under a different definition, but I believe a lot of the Foreclosure/ Auction flippers do seller financing through "rent to own" deals. They have the properties paid off so there are no third parties involved. I've seen several signs around town and on Craigslist offering these types of deals.

This is a bit different. In this case, the profit has likely already been taken out of the sale. The investors are buying for cash or via mortgages, and selling via rent-to-own.

This is a great technique for making profits in real estate. You can get an up-front fee (option fee), rental income, the feeling of ownership in your tenant, and an agreed sales price all at the same time. But this really isn't the same as seller financing.

When you are selling a rent-to-own, or lease-option property, you (only) are the owner. The renter only has a right to buy the property at a fixed price. When the sale finally occurs, the buyer would normally get their own financing -- not via the seller.

So rent-to-own is a great way to sell, but not a great way to buy.

 

[rcardin]

This is really an in depth topic.

First off why would you want to buy using owner finance? The terms are going to be high and long. As an investor you will never make any money on that kind of deal. If your credit sucks and you have very little saved it could be a way to at least own the beneficial right of home ownership meaning tax benefits of the loan.

As a SELLER you are rolling the dice. The laws have changed and you have to be on top of them. What was legal 10 years ago probably isn't now. Ask me how I know.

If your contract is written inside the law it can be a nice way to keep good tenants. You'll get 3-5 k down and average to above average rental payments. This is important that your contract says in case of default all monies received were considered rent and the contract ot buy is void. Without something to this effect you would have to foreclose.

A contract to buy becomes an Executory contract and falls under the buy and sell section of your states property law. Different rulles apply.

Hopes this helps

 

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[MonTexan]

First off why would you want to buy using owner finance? The terms are going to be high and long. As an investor you will never make any money on that kind of deal. If your credit sucks and you have very little saved it could be a way to at least own the beneficial right of home ownership meaning tax benefits of the loan.

Not necessarily.

What about the guy who owns a car wash that he built 20 years ago? He's operated the business himself for 20 years, turned every wrench, and fixed every leak, and now owns it free-and-clear. Problem is he's now in poor health and can't take care of the place. He's tried to sell it for $225,000 but didn't get any takers. Meanwhile it sat empty and more stuff broke. When it stole a guy's quarters, he got pissed and smashed up the change machine.

Along comes an investor with the idea that he may be able to turn this place back around. Problem is he doesn't have $50k to put down PLUS $60k to get the place back into shape, and no bank is going to make a loan on the POS. Maybe, just maybe, the seller would be willing to sell it on 100% owner financing and carry the note for 25 years at 6%. He just wants out, and that annuity sounds fairly attractive. Plus, he gets to see his "baby" brought back up to snuff. This COULD be a very attractive way to buy on owner financing at rates lower than you could even get from your local bank. I've known several people to get 100% owner financing at 0% interest....lots of sellers out there aren't necessarily interested in the cheese, they just want out of the trap.

 

[LesG]

Will the property be in your (the buyer's) name or will it remain in the seller's name until you've paid on whatever terms you agree to?

Normally the buyers name, but you can still have it in the seller. Believe that is called a Land Contract or Contract for Deed. If you are the buyer, you don't want that.


Is the deed registered in your name when you purchase or does it stay in the seller's name?

Again, normally your name if you mean "Grant" Deed.

How does it work when you sell the property since it seems to be an informal agreement?

No it is formal. It's in writing and notarized and recorded at the county.

Would it still work the same way where you would obtain a payoff from the seller and the funds are wired into their account on the day of closing? Do you even have the right to sell without getting the OK from the seller first?

Only if you put a Due on Sale Clause in it. May I recommend you don't put a Due on Sale Clause. I would have a preprinted amortization chart for the seller so you don't have them work so hard in the future.

Are there certain types of properties in which seller financing may be the better option vs. something else? Meaning, is this something you might do for lower priced properties, but would definitely stay away from when you are getting into mid to upper class properties? Or is this better when dealing with FSBO vs. properties listed with an agent, etc?

Normally seller financing is harder with agents listings since they want to get paid and normally agents will sway their clients away from guys like you. I would sway away from hazardous wasted properties.

It would make sense that this is an avenue to allow me to purchase a property but I guess I just don't feel I know enough to feel comfortable moving forward at this point. Sorry for all of the questions everyone!

I would agree that you will not feel confortable. You will not feel confortable until you do your second seller financed note. I would hope that you studied much more before doing one. The key is to study as much as you can. Then find a seller that will do one. In your case hire an attorney title officer, or partner with a mentor that is knowledgable enough to assist.

 

[hatterasguy]

Seller financing is hard to put in place you need to find the right person. A lot of times older people have the property paid for and would be more willing to consider this if they don't need the cash right away.

Hypothetical example:

Say grandma is moving in with one of her kids. She owns her house free and clear and just wants to get out without the hassle of listing and showing it. She doesn't need the chunk right away, but would be happy with XXX each month insted to live on.

In situations like that you might find them pretty receptive.

 

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[chandabb]

Thanks for the replies les and hatterasguy. I do believe I would need to do more research and actually see this in action before trying to use it as an option. I was just looking for ways to finance my first property. It still looks like having 20% down is my best option at this point. I know their are "creative financing" options out there, but it all seems very complicated to me. I guess I'm probably making it harder than it is, but I guess until I can follow some of these methods in real life, it's just hard for me to grasp how it will work.

Thanks again! :thankyousign:

 

[LesG]

Hang in there. To do a seller finance note is really easy, but if you never done it is actually very hard. It's a paradox. I spent countless hours studying it and all i had to do was ask the title officer to do it. I actually didn't do much of anything.

===

I believe and easier way is to "partner."

1) Investor friend has money.
2) Investor friend can get a loan.

Okay partner with them. Isn't that easy.

But, but, but..... Watch how fear will set in as you read this.
It's that easy. Partner.

 

[hatterasguy]

Lots of ways to finance a deal. Your not going to get much done going through banks with conventional mortgages.

Go find a money partner, or someone who just wants to lend money. Seller financing isn't a bad option, give it a try.

 

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[Lincolnman1]

Hattersguy......Where is a good place to look for a money partner, or a private accredited investor

 

[hatterasguy]

Go join a Rotary club in your area and get active with the local business community.



I found lenders because my hobbies tend to be populated by people of means; sailboat racing, and Mercedes clubs. If you know people with a lot of cash sitting around, and they know your business they usualy will lend you money.