Real Estate Investor Explains How Seller Financing Works and Benefits

• With seller financing, the buyer buys directly from the seller rather than through a traditional mortgage originator.
• Buyers and sellers can set loan terms, such as interest rates and down payments.
• Investor Mike Newton likes this method of financing because it is faster and cheaper.

If Mike Newton could buy all of his investment properties through seller financing, he would.

“Seller financing is the holy grail of real estate investing,” the 31-year-old real estate investor told Insider. “I wish I could do it like this with every transaction.”

With seller financing, rather than using a traditional mortgage originator such as a bank, credit union, or government agency, the property owner acts as the lender and provides the buyer with a loan with agreed-upon terms. In other words, the buyer pays in installments directly from the seller, just as they would with a traditional loan.

“Seller financing is great for a variety of different reasons, but probably the best reason is that you can set the terms of the loan, such as interest rates and payment schedules,” explained Newton, who worked with the seller to buy his eight properties Two 2020 and 2021 financings in investment properties. Insiders confirmed the details by reviewing closing documents. He and the owners of both properties (both purchased from the same person) agreed to a 20% reduction at a fixed rate of 4.9% and amortization over 15 years.

Newton prefers a 30-year amortization schedule because it makes his payments more amortized, lower monthly payments, and improves his cash flow on investment properties, noting: “But when I talk to the seller While chatting, he said, “I’m in my 70s. I won’t live another 30 years. “I said, ‘Fair enough. You said it very well. I understand why you want 15 years of amortization.'”

That’s the beauty of seller financing, he adds: “It allows you to solve the problems that the seller may have and solve the problems that the buyer may have.” As a buyer, you may not qualify if you are in a traditional mortgage lender Financials of getting a loan, “You can very realistically buy a house with bad credit and no funds.”

Common situations where buyers seek seller financing deals are buying vacant land, buying an aging property or property that requires a lot of work that the seller has difficulty unloading, or buying a property under $100,000. The process benefits the seller as these transactions provide cash flow , they cut expensive agency commissions, and in the event of a default, the seller still owns the property outright.

While the terms are usually negotiated between the buyer and the seller, the amortization term and interest rate are closer to what is the case with commercial real estate loans versus residential loans.

The process is usually faster and cheaper when you work directly with the seller and unbank.

“There are no closing costs, no initiation fees, and no appraisal fees,” Newton explained. “You can still have an inspection if you want, but it’s not required.”

As for sellers, they receive a steady stream of passive income on their monthly payments, which is great for sellers who live on a regular income or who don’t necessarily need or want a large one-time payment. Property sales.

“It’s a more efficient way to generate real Passive income is better than traditional real estate investing,” Newton said. “Because the seller is no longer responsible for managing the property and tenants. They are actually banks. They don’t participate. “

Once Newton and the seller agreed on terms, they drafted a contract. Newton now pays sellers directly every month.

“We have a contract, like your contract with a bank,” he explained. “At the end of the payment, I will own the property outright. I can also pay it off early if I want to.”

One of the big caveats of seller financing is the “sale at maturity” clause, Dana Bull, Real Estate Consultant and Investor Tells Insider: “When you take out a mortgage, there is a clause in that promissory note called a ‘sale at maturity’ clause. This means that if the bank can ask the borrower to pay the remaining loan balance, there is a change in the title.” Essentially, if the mortgage company sees a new owner, it will consider the home for sale and can demand full payment of the remaining debt.

“While it is possible, if the seller does not fully own the property, then seller financing becomes very tricky,” Bull said. “Because, technically, if you have a mortgage, you don’t fully own the property. Banks are also interested in the property, and their loan collateral is the asset.”

Part of the reason seller financing is uncommon is that most people don’t fully own their property, she said.

Finding someone willing and able to do seller financing can be challenging. In Newton’s case, he told his property manager that he was interested in this type of financing. She happened to have another client who was selling a bunch of his rental properties and wanted seller financing, so she connected the two of them.

If you want to go this route, “start building a network and tell people you’re interested in seller financing,” Newton advises.

When you actually look at a property, “you can often figure out what someone’s mortgage is owed, or you can see if they’ve refinanced in the past,” Bull added. “That’s information that’s available through public records.” You can look for places that are fully paid or close to paying, “but the most important thing is to ask the seller,” she said.

Both Bull and Newton expect sell-side financing to become more popular in the near future.

“It’s not very popular lately because the rate is 2.5-3%. Why would a seller offer this to a buyer if there’s not much juice to squeeze?” Bull said. “But now that we’re in an environment where interest rates are going up, sellers may think that if I don’t need this one-time payment, there’s a pretty good return here.”