I love Seller Financing.
I think it’s a creative, flexible and advantageous way of buying a home that can be incredibly useful for both the seller and the buyer.
Basically, Seller Financing means removing the traditional mortgage lender from the equation and reaching a unique deal between you (the buyer) and the home seller. This makes things SO much more flexible, fast, and yes… it could even be free!
In this post, I’ll give you a brief overview of how this type of transaction works. Then, I’ll delve into the top 10 major benefits of seller financing. By the end of this post, it should be crystal-clear to you why I adore Seller Financing.
How Seller Financing Works
To put it simply, Seller Financing refers to an arrangement where the property owner offers to finance the buyer. You may be familiar with the term “Owner Financing”. It’s the same thing – they are simply two different names for the same strategy.
The seller of the property becomes the home buyer’s lender – and a unique arrangement for the loan terms is made.
Often, with this type of arrangement, the homebuyer signs a promissory note with all of the details regarding the loan – such as the schedule for repayments and the interest rate.
No matter what the arrangement, the seller can always reclaim the home if the buyer does not keep up with the payments. (This means that Seller Financing provides low risk for the seller.)
When Does Seller Financing Usually Happen?
Seller financing is not a new concept – it has been around for a while. However, when it became easier to get credit in the late 1990s and early 2000s, Seller Financing became less common. Seller financing works well in any market, but the time it really starts to shine is in depressed markets, or markets where credit can be hard to obtain.
When credit is more difficult to obtain – the lost art of Seller Financing comes back with a vengence. Seller financing is still relatively uncommon, but there are a few situations when sellers are more willing to finance their home in this way, such as:
- When the seller doesn’t need receive a bunch of cash up front (they may even prefer the monthly payments with interest!)
- When it is the type of property that conventional lenders (i.e. Wells Fargo, Bank of America, LoanDepot, etc.) refuse to finance
- When the seller is facing foreclosure and needs you to buy their home quickly (seller financing means you can buy the home much more quickly through an attorney’s office, vs. waiting for title companies to put your transaction together.)
- When sellers are maintaining payments on two houses, such as if they had to transfer for a job or if they have a vacant rental property.
Also, sometimes if the property is not selling for a long time under conventional methods – the owner will offer seller financing as a way of standing out from the rest of the crowd so that they can move the home sale along.
When it comes down to it, Seller Financing is more common in housing markets where mortgages are difficult to obtain. This happens for two reasons:
- If it is easy to get a mortgage and the interested buyer can’t get one, the seller will be pretty suspicious of them. However, if it is difficult to obtain a loan – the seller understands that there may be perfectly good buyers out there who simply don’t qualify for traditional financing – so they probably won’t hold it against you.
- Also, when credit is difficult to obtain it becomes more challenging to sell the house – so a seller might be more open to considering alternative options…just to sell the house faster
The Top 10 Benefits of Seller Financing
This type of real estate transaction offers a lot of advantages for both the buyer and the seller and it’s a very smart way of buying & investing. Here are the main benefits of seller financing.
- Everything is Negotiable
- You Can Start Buying Houses Even With Little to No Money
- It’s More Cost Effective for the Buyer
- There’s No Need to Meet Traditional Lending/Bank Requirements
- You’ll Have Lower Closing Costs
- You Can Offer High Equity Sellers A Price Cash Buyers Can’t Compete With
- You Can Take Advantage of Free Leads
- You Can Close the Deal Quickly
- It’s More Personal
- It’s Not What Everyone Else is Doing – Seller Financing is a Blue Ocean in Real Estate Investing
1. Everything is Negotiable
When you buy a house the conventional way and take out a loan with the bank – they will dictate the terms and you can either take it or leave it.
However, that’s NOT the case with Seller Financing.
There’s a reason why this type of deal is often called “creative financing.”
You can get really creative with it.
There are no rules for the agreement, so you and the seller can work out a completely unique deal that works best for both of you.
This makes the agreement like a blank canvas – you can strike any deal you (and your seller) like.
You can mix and match payments. You can agree on little or no down payment, or a balloon payment, or an interest-only deal. You can adjust the interest rates periodically, or keep them at the same rate for the term of the loan. It’s totally up to you to reach an agreement that works for both you and your seller.
(Plus, if you have strong negotiation skills this means that you will be able to get more out of every deal AND make your seller feel better about signing on the dotted line!)
NOTE: Depending on what state you live in, there may be some broad rules about the maximum interest rate and the number of seller financed deals you can maintain at any one time. So, make sure you check the local regulations before you proceed.
2. You Can Start Buying Houses Even With Little to No Money
One of the huge advantages of buying sub2 or seller financed, is that you really don’t have to put very much (if any) cash on the table to get the deal done.
My Real Estate Investing career is proof of the fact that you don’t have to be rich to start buying houses with Seller Financing. In fact, I started buying my first 45 houses with zero capital in my bank account. (Yup – I was a penniless real estate investor. Pretty cool, huh?)
Since there are no rules for the deal and you can negotiate directly with the homeowner, you can arrange for a delightfully low down payment. You may be able to get away with paying only 10% or less – sometimes even 0 down payment.
Once you close the deal on the property, you can then seek out a tenant who will rent out the home – so that you can collect the positive cash flow difference every month.
That’s right. You can buy a property for little to no money down and then use that property to create a steady stream of income! There’s no need to risk any real capital – all you will “risk” is the time it takes for you to get the seller to agree to let you buy the house.
In other words, all you need is a silver tongue (and golden negotiation skills) to get the seller to shake hands on the deal. Then, you’ll have the ability to get unlimited funding for your deals, lent directly into an LLC without any recourse. (That means that, heaven forbid, if everything went south and they foreclosed on us – our personal credit would emerge without a scratch. Everything is done within the company.)
It sounds too good to be true, but that’s the power of Seller Financing!
Are you starting to see yet why I love it so much?
3. It’s More Cost Effective for the Buyer
When you buy a home with Seller Financing, you’ll eliminate all of the administrative and appraisal fees as well as other hidden charges that you might incur with traditional lenders.
Because Seller Financing is a direct deal, the only cost you will incur is the amount you pay for the house and the interest – according to your agreement with the seller.
Also, you may be able to get an interest rate that is better than the current market rates – because you are making a deal with the seller rather than with the bank.
Plus, sometimes the seller is motivated to make a deal quickly – because of an urgent need to relocate. They might have to move to another city for a new job that is starting soon, they may be divorced or there may be some other reason why they need to sell their house soon.
Why is that cost-effective for the buyers?
I’m glad you asked. Here’s why: If you’re an investor, time is an expensive asset that you really can’t waste if you plan to make your mark in this incredibly competitive (but extremely lucrative!) industry.
Since Seller Financing sellers often have urgent needs, this makes the transaction process that much faster. You’d be surprised at how many hours saved, energy reserved, and headache avoided by doing Seller Financing transactions — as opposed to other property-buying method.
4. There’s No Need to Meet Traditional Lending/Bank Requirements
When you are buying a home the traditional way, you have to be approved by the bank in order to qualify for a home loan.
This feels kinda like that awkward moment when you are trying to win the approval of your partner’s uptight parents. You present the best and most responsible version of yourself, but they still frown and shake their heads…
But with Seller Financing, there’s no need for that. You can buy the home, even if you don’t meet conventional lending requirements. Even if the seller demands a credit report, they will usually be much less stringent and more flexible than a traditional lender.
Thank goodness for that, because no one loves going through layers of bureaucracy!
Of course, the seller still needs to trust you! You’ll still need to prove to the seller that you are a worthy borrower and that they are not taking a dangerous risk by making this deal with you. (It helps to explain to them that if you do default on the payment, the property will be returned to them.)
But, once you have the seller on your side there is much less paperwork and hassles than you would experience with a traditional bank loan.
How are the other guys buying houses? The majority of them are spending their own cash, or they are personally signing away their lives simply to get loans to buy the houses with. However, we just have to sign a contract – we don’t have to sit in front of a banker and show them two years of tax returns and our credit report and sign away our first born child as collateral.
Think about that for a second – and realize that Seller Financing is in fact, a great way to make money in Real Estate.
5. You’ll Have Lower Closing Costs
When you are buying a home with Seller Financing, the process will be much easier and less expensive.
Since you are not using a traditional financing method, there will be no processing fees, origination fees, administration fees or any of the other assorted fees that are regularly charged by lenders. These fees can be up to 2-3% of the loan amount, so that makes a BIG difference.
(Of course, there are a few closing costs that are unavoidable whenever a property is changing hands. For example, sometimes counties charge a transfer tax when the property is sold – and you also may need to pay a recording fee to the county recorder for filing real estate documents.)
6. You Can Offer High Equity Sellers A Price Cash Buyers Can’t Compete With
Conventional real estate investing knowledge tells you that you need to buy a house at a large discount, so that you’ll have room to make a profit.
Makes sense, right?
The general advice is that you should buy at a maximum of 75% of the estimated “After Repair Value” – which is how much the house will be worth once its fixed up. So, for example, if you estimate that the ARV of the house is going to be $100,000 – then you would need to be “all in” at $75,000.
This means that if there is $25,000 worth of renovations that need to happen to get the house to the point where it is worth $100,000 – then you only have $50,000 left to buy the house with.
This conventional knowledge factors in all of the closing costs, holding costs and other fees. If you stick to the practice of buying at 75%, you should usually benefit from the deal and at the very worst, break even. It’s an equation that helps you figure out whether the risk you’re taking with your capital is outweighed by the discount you get on the property.
BUT – one of the benefits of Seller Financing is that you are no longer bound by this number!
The only reason that you would need to stick to 75% is because, in conventional buying, you’re putting a lot of cash on the table. However, with Seller Financing you’re NOT spending very much (or even any) of your cash to get the deal.
There’s no need to worry about this common advice, because we haven’t actually risked any real capital.
So, this is why you can offer the seller a price that conventional buyers just can’t compete with.
For example, let’s imagine a homeowner whose house is worth $100,000 and he is getting offers of $75,000 from other buyers. We can stroll in and offer him $90,000 (paid back over time + interest), which will really make him sit up and pay attention. And he should, because when all is said and done, YOU – the Seller Financing guy – is offering the best BANG for his buck!
7. You Can Take Advantage of Free Leads
You know all of those other cash buyers out there? The ones who are buying houses the conventional way?
They spend thousands per month on marketing, but often they get a bunch of leads that owe too much to make the deal work. Or, they get leads who won’t accept an offer as low as they need.
What do those buyers usually do with these leads they can’t work with?
They usually just throw them away.
But you know what they say… one investor’s trash is another (smart) investor’s treasure.
You can jump in there and say to them, “Look, I actually specialize in these types of deals. If you find a lead you can’t work with, just send the seller my way and I’ll close the deal with seller financing. I’ll pay you for the warm hand-off, so those leads you can’t use will actually benefit you.”
This is a WIN-WIN-WIN situation.
- It’s a WIN for the other buyer, because you will help their conversion rates go up without having them do any more work.
- It’s a WIN for you, because you’re getting free leads without having to spend a penny on marketing.
- And it’s a WIN for the homeowner, because you will be able to make a deal with them and meet them at a price that the other buyer couldn’t manage.
8. You Can Close the Deal Quickly
When it comes to traditional lender financing – closing the deal can be a long and drawn out process.
It can sometimes take months to be qualified by the bank to purchase the property. Ugh. That’s a long wait!
However, another one of the benefits of Seller Financing is that the closing times are a lot shorter. If a typical closing process involving a third-party lender can take anywhere from 6-8 weeks – a seller financing transaction can be closed in only 2-3 weeks (and sometimes even more quickly!)
There’s no need to wait for a bank loan, an underwriter or a legal department to approve and process the deal. This is because the seller themselves is providing the financing – extending you credit in order to cover the purchase price of the home. Then, you’ll be making regular payments until the amount is paid in full.
You can close the deal quickly in a way that benefits both you and the seller – then move on to the next deal. This way, you’ll be making more money faster – and your sellers will get their property sold fast (and at a price they want!)
9. It’s More Personal
What’s another advantage to working out a unique agreement between you and your seller? Well, it could simply be the fact that you are reaching an arrangement between you and another human being – rather than with a cold financial institution.
For example, perhaps your financial history is a little bit messy because you had something go seriously wrong in your past. The bank will likely NOT see the grey areas in your situation. They will simply see that you don’t meet their requirements and they will not qualify you for the loan.
However, when you are negotiating with another individual, they might be more willing to listen to your side of the story. If you present yourself honestly and build a rapport with them, then there’s a great chance they’ll be happy to make a deal with you.
The key is to paint a picture that will make the seller comfortable with offering financing to you. As long as you’re able to do that, and actually DELIVER on your promise, the deal will work out profitable for both you & your seller.
10. It’s Not What Everyone Else is Doing – Seller Financing is a Blue Ocean in Real Estate Investing
Another one of the best things about Seller Financing is that it’s different. There are many other real estate investors out there who are using wholesale or flipping strategies, but not many who are willing to learn the Art & Science of Seller Financing.
It’s what’s called a “Blue Ocean Strategy” (which is a market where there is very little competition – just one big blue ocean that’s all yours to swim in.)
The Average Joe Homeowner ends up with piles of postcards on their kitchen table from real estate investors – and they all say the same thing… “I’ll buy your house cash and cut you off your knees by asking for a steep discount!”
You can add yourself to this pile of sameness – or you can stand out by doing something different. A much needed breather in the eyes of your seller…they’ll be relieved to see someone who’s actually trying to work out a deal that makes sense for both parties – as opposed to only themselves.
With Seller Financing, you have a way to offer your seller a price that cash buyers can never compete with. Not in a million years. (And you know what, every other type of buyer outside of aqq seller financed buyer is a cash buyer.)
All of these other investors are going out there and looking for the same thing. They have been taught to look for a certain criteria when it comes to a “good investment” and they are only looking for deals within that narrowly defined box.
There’s a HUGE advantage to zigging while everyone else is zagging. Owner financing allows you to think outside the box – which always gives you the advantage.
90% of the sweet, sweet deals I have closed to get to where I am today have come from other investors who have passed up on the deal themselves – because they didn’t know how to handle it.
Because I was able to be creative and think outside the box, I could come up and sweep up behind all of these other investors. They were SO focused in on the typical investing methods that they never thought to approach things in a different way – so they missed out on potential enormous profits. I’m talking 6-figure profits on a single deal.
In Conclusion: Owner Financing Is a Fantastic Way to Make Money in Real Estate
As you can see, there are a lot of benefits to Seller Financing. This type of real estate is a smart, advantageous and creative way to buy homes.
In my experience, it’s one of the very best ways to make money in real estate investing. There are so many different ways you can arrange a seller financing deal (which translates to a significantly higher closing rate) – and it can be incredibly beneficial for both the buyer AND the seller.
Of course, it’s a bit complicated. There are a lot of things to learn before you get started. Fortunately, you’re in the right place. On this blog, I will be sharing friendly, helpful and easy to understand guides to many different aspects of Seller Financing and real estate investing. So, rather than find yourself scratching your head over a complex jumble of legal mumbo-jumbo, you can get clear, no-nonsense answers to all of your real estate investing questions.