What Is Seller Financing In Real
Estate Investing
By Tom Bukacek
The author has permitted the reprinting and redistribution of this
article.
Have you been trying to buy a house through traditional means lately
Using a Realtor and mortgage broker to purchase a dream house with a
white picket fence isn’t as easy as it used to be.
How about selling you home Finding a buyer who can qualify for a loan
is extremely difficult as well.
Who is the culprit most responsible for buyers not being able to
purchase property and sellers not being able to transact The bank! So
if you could eliminate the bank from this process, do you think you
would be able to make a real estate transaction
A popular and easy to execute strategy that offers a solution to both
scenarios is known as Seller Financing. Seller financing is when the
owner takes a second note, or even finances the entire purchase of the
property in order to assist the seller in financing a real estate
transaction.
Usually sellers will offer this option when a buyer has difficulty
qualifying for a conventional loan or meeting the 20-30% required bank
down payment.
Seller financing differs from a traditional loan because the seller
does not give the buyer cash to complete the purchase, as does a
lender. Instead, it involves extending a credit against the purchase
price of the home while the buyer executes a promissory note and trust
deed in the seller's favor.
These special circumstances must be acceptable to the lender who makes
the first mortgage on the property. The necessary paperwork is prepared
by the title or escrow company after the terms are worked out between
the buyer and seller.
Seller financing is advantageous to the buyer for three main reasons.
First, seller financing typically has less closing costs than
conventional financing. Conventional financing has closing fees up to
9% of the deal. With seller financing, the fees are generally less than
conventional fees and usually between than 5-7% of the deal.
Second, in addition to the closing fees being reduced, the down payment
required is generally less. For banks, a 20-30% down payment is
required. For seller financing, that amount is negotiated, but
generally is around 10-20%. Generally speaking, the higher down payment
you invest in your property, the less risk in the eyes of the owner
financing the property and the better monthly payment plan you may
negotiate.
Finally, you have more flexibility on the terms. The parties can
negotiate the interest rate and the repayment schedule, as well as
other conditions of the loan. The buyer can request special conditions
of the purchase, such as the inclusion of household appliances. Also,
the borrower does not have to qualify with a loan underwriter. And,
unless negotiated, there are no PMI insurance premiums.
The following would be an example of a typical owner finance terms
• 5% owner finance fee
• Initial down payment of at least 10% of the sale price
• Fully amortized term between 24 and 120 months
• Interest rate of 8 to 20%.
The interest rates are higher than conventional loans in order for the
owner to counterbalance the risks - limited equity, a payer with low or
no credit score, possible foreclosure, or having to foot the bill for
legal actions and selling the property via auction. But with the
elimination of PMI Insurance, the monthly costs end up about the same.
As the buyer, you will need to make the determination as to whether or
not a higher monthly payment for 1-3 years is worth the ability to own
your dream home.
The benefits of seller financing the property for the seller are as
follows
1) You receive payment 3 different times. As the seller, you receive
money when you sell the property (in the form of the owner finance
fee), when you receive monthly payments (difference between what you
receive and what you owe), and when you the mortgage balloons at the
end of your term (negotiable, but generally balloons within 2-5 years).
2) You are the BANK, not the landlord. All you do is collect checks.
You are no longer responsible for repairs. Do people call Chase Bank
when their toilet clogs No. And your buyer will not call you for
repairs. Again, they’re the homeowner and responsible for all
maintenance and repairs. All you do now is collect money!
3) Flexibility. You can determine whether or not a buyer qualifies
instead of leaving it up to banks. If their credit score, job history,
and reserve requirements are to your liking, then you make the decision
as to whether or not to execute the deal.
In summary, seller financing is an advantageous strategy for both
buyers and seller as under current economic and banking conditions,
many buyers do not qualify for conventional loans and transactions are
not being made. This strategy is also attractive because the fees are
lower and the requirements are more flexible and negotiable. Anytime
you can take banks or underwriters out of the equation, you can
guarantee a much more personal and expedient outcome.
Tom Bukacek is an investor in Austin, TX who focuses on multiple
strategies and educates others on real estate investing as well. For
more information, please visit
httpwww.austinmillionaireblueprint.com.
If
you would like to take advantage of the market and learn how to invest
in real estate and you are local to the Dallas Fort Worth area, I know
a really great teacher and mentor here in Arlington Texas. Please take
a look at his web site: DennisJHenson.com,
Dennis has a great Mentoring and training program, I know because I am
one of his former students. I learned a lot from his one on one
teaching technique. - Michael Harman 817-457-7572
mchfun.business@gmail.com
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