Put Seller Financing to Work for you

By: Mark Sumpter

Seller financing is an important and popular tool that can help buyers purchase a property they could otherwise not be able to buy. Sellers are sometimes willing to become 'banks' for the buyer, taking payments just like a bank would until the loan is paid off. In all other respects the transaction is the same as through traditional financing - the deed is transferred to your name, and you simply make your payments to the seller instead of to a bank.

More and more sellers are offering financing because the rate of return they can get is better than through income-producing investments like certificates of deposit, money market accounts, or other 'safe' investment vehicles. It's easy to understand: a seller will be much happier receiving 7 percent interest on the mortgage he offers you than receiving 2 or 3 percent from a money market account.

For buyers, seller financing can be a cheaper alternative. You won't pay loan fees, or PMI premiums, and in many cases the credit checks and underwriting requirements are much lower. (Some sellers won't even check your credit.) In general the closing costs involved in seller financing are much lower than with traditional financing.

Why would the seller be willing to finance your purchase of their property? There are a number of possible advantages. The seller may be willing to offer financing if:

* The property type is difficult to finance through traditional third party lenders.
* The property has been on the market for 90 or more days.
* An 'as-is' closing is desired on a property in need of repairs.
* The owner has not met minimum holding time or title seasoning requirements required by traditional lenders.
* An immediate closing required due to imminent foreclosure or other financial burdens.
* A quick closing is preferred by seller to free up investment capital.
* The seller wants long-term interest income.

The last situation listed is especially common. Here's why: let's say you've owned a rental property for a number of years and have paid off the mortgage. You enjoy the monthly income you receive from rental payments, but you're not interested in being a landlord any more. By selling the property and offering owner financing, you still get monthly income - but you avoid all the duties of being a landlord, since that's now the new owner's role. In addition, you've avoided any capital gains taxes that might be due if you sold the property outright.

Here's why seller financing can be advantageous to you as the buyer:

* You can often put little or no money down. Some sellers will require ten, twenty, or thirty percent down, but many will accept less than ten percent, especially if their goal is to receive monthly income from the property in the form of mortgage payments.
* You'll face lower credit requirements. As I mentioned earlier, some sellers won't check your credit at all. Most will simply make sure you've had no bankruptcies or foreclosures in your past.
* Sellers won't require you to have an underlying (qualifying) income. If it's an investment property you're buying, a traditional lender will expect you to have sufficient income to cover at least some of the monthly payments on the property in case your units are vacant for a period of time. Sellers assume your income will be derived from rent payments. As long as the rent you will receive covers the monthly payments, the typical seller won't ask about your monthly income from other sources.
* The terms can be more flexible. You and the seller agree on terms - you can decide on any terms you're comfortable with. Price, interest rate, terms, and any other loan requirements are all up for negotiation. If you have unusual needs, you and the seller may be able to reach an agreement that a traditional lender won't. For instance, let's say you work on commission, and at year-end you always receive a lump-sum payout. If the seller agrees, you could make lower monthly payments for eleven months of the year, and a larger payment on the twelfth month.
* Closing costs are lower. Sellers don't usually ask for points, loan application fees, origination fees, etc. The seller isn't covering advertising costs, overhead, or other costs that a lending institution has to cover.
* You'll complete less paperwork. Sellers don't answer to a bureaucracy, so the only paperwork you'll complete is what's absolutely necessary for the transaction to be legal in your locality.
* The sale can take place much more quickly. I've known people who have been able to close on a property within a week of signing a contract.

Some sellers will ask for a balloon note - they want monthly payments for a certain number of years, and after that they'd like to cash out. Situations like that are common when the owner is nearing retirement age. If the owners are in their early 60s, for instance, they're probably not concerned about receiving mortgage payments for the next 30 years... five or ten years may be long enough.

When the balloon payment is due, you'll simply get traditional financing (or use another creative financing method.) If your goal is to refurbish the property and re-sell it, make sure you negotiate for enough time before the balloon note becomes due for you to complete your repairs and sell the property.

Keep in mind that the loan agreement you reach can have 'unusual' requirements. It's not uncommon to buy a property using owner financing and find a clause in the contract stipulating you can not sell the property for at least five years - the owner wants to be sure he receives mortgage payments for at least five years before receiving the balance of the principal. Make sure you're comfortable with whatever agreements you reach.

There's a major advantage to using seller financing if you're trying to accumulate properties: if you've bought a property financed by the seller, the transaction will not show up on your credit report. That can be an advantage if you're trying to buy multiple properties, or if your credit is marginal to begin with. Properties purchased through seller financing are 'transparent' to lending institutions.

When you're looking for , some will be advertised as 'owner financing available' or 'seller financing available.' In many cases, the seller may be willing to offer financing but isn't advertising that fact. If you find a property you want to buy, you can always make seller financing a contingency of your offer.

Like most things - you won't know until you ask. If the seller isn't interested in carrying financing, that's okay... because he or she doesn't have to agree.

If the sellers weren't originally offering financing, they're unlikely to entertain the idea unless you put the request in writing as a part of your offer to buy the property. Think about it: if you're selling a property, and a person casually asks if you're interested in financing it, you're likely to say no. If their request comes with an attractive offer on the property, and you haven't had many offers... you may be more willing to at least look at the possibility.

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