Why Use Seller Financing?

Here’s an example of a buyer using seller financing to purchase a property.

The buyer, a real estate investor, bought a cabin in a sparsely populated place. Recognizing that the seller didn’t really have many potential buyers, he negotiated a seller carry-back. Basically the seller is carrying back the mortgage. The advantage? No appraisals or closing costs, or downpayment(well ok, some downpayment). And a better rate than he could have from a bank.

The seller probably executed an All Inclusive Trust Deed (AITD) to wrap his existing loan into a new mortgage for the seller. It seems like the payments from the buyer were for the amount he owed on it.

However, in order to make some extra money, the seller could’ve charged the buyer 8% interest. For example suppose I have a 30 fixed loan at 6.25% on a $100,000 30 year loan. The interest payments are $520/month (lets ignore the principle portion in this example). Suppose I offer to finance it to a buyer at 8% with on $120,000 purchase and loan amount, the payments I get are $800/month. That leaves with me a net profit of $280/month.

Of course, if you’re offering long term fixed rate financing you should make sure that you have fixed rate financing too! If you have a 30 yr loan and you’re 15 years into it, after 15 years you don’t have a mortgage payment, so all of the payments from the buyer are yours to keep! (A great way to boost your income in your retirement years.)

Make sure you don’t have a 5 year ARM on it. If you do, put a provision in your mortgage that states there’s a balloon payment after the 4th year. This means you get cashed out at that point. Of course, you wouldn’t want to offer 100% financing in a flat or down market in a situation like this. You’d want 20% down so in case the buyer doesn’t get financing and just abandons the property (or you foreclose on him) then you’re not left upside down yourself!

Advertising a property as a seller-financed property is a good way to get more interest in a slow moving markets. As the subprime lending dries up, this may be the only recourse for many buyers with no credit.

And it might be the only way a buyer can dispose of a property in some markets like Florida!

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