That's why I created this comprehensive guide. My goal is that after it reading you understand seller financing and how it can benefit you as a buyer of real estate. Based on my years of experience with seller financing as a buyer and seller, I'll show you what it is, how it works, the pros and cons of using it, and how to find, negotiate, and execute it.
This guide is almost 7, words long! To give you all the details you need to know, I had to cover a lot of ground. But don't feel like you need to read everything all at once. Start with the parts that interest you the most, and then dig into the examples and details until they make more sense.
And be sure to bookmark this as a resource to come back to over and over again. When a master carpenter builds a house, he uses different tools for different situations. To drive a nail, he uses a hammer. For cutting wood, he uses a saw.
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To turn a screw, he uses a screw driver. And so it is with real estate financing.
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The different types of real estate financing are just tools in a toolbox. And the more tools you have and know how to use, the better real estate investor you will be. Seller financing is one of the better tools available to you. But the other tools in your real estate financing toolbox include:. It would be ridiculous for a carpenter to try to use a hammer to cut a board or turn a screw. Yet, real estate investors try to use only 1 or 2 of the financing types above usually conventional financing. This is basically like hitting every object i.
But you may miss out on many opportunities that could have been unlocked with more financing knowledge and skills. And eventually you may hit a wall of frustration and perhaps a bruised ego as your growth slows. The definition of seller financing is a transaction where the seller extends credit to the buyer. You can think of it as a loan, although no money actually changes hand between the buyer and seller. So at its most basic, seller financing just means the seller of real estate waits to get all of his or her sales price. There are actually different variations on the idea of seller financing.
The overall topic of seller financing can be confusing because there are numerous techniques and related terms that often get lumped together. They include:. But other names, like bond-for-title, contract-for-deed, lease options, subject-to, and wrap-around mortgages are similar but different techniques. But you can see links to a couple of videos I made in the section on seller financing with an existing mortgage. In case all of that is confusing, let me explain exactly how this seller financing process works using some diagrams.
A picture is worth 1, words, right? Here is a diagram of how a closing would would typically work if you got bank financing. You just follow the money and the property. In this case:. So, these three parties plus the closing agent an attorney or title company are involved in the closing.
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A seller financing transaction is similar, but there is a key difference: no bank or 3rd party lender. This time there are only two parties plus the closing agent. Instead, the seller lets the buyer pay on credit over time. You know that there are always pros and cons to every strategy.
The Ins And Outs of Seller-Financed Real Estate Deals
Seller financing is no different. Now let me demonstrate these pros and cons by sharing the example of my first seller financing purchase. In I bought a 3 bedroom single family house using seller financing. The sellers, named Ed and Eileen, were retired Methodist ministers and a wonderful couple. I was 25 years old, and I was only a couple of years out of college. This was my first seller financing purchase, and it was one of my first rental property purchases period I had previously only flipped and wholesaled properties.
Looking back now, I might have done a few things differently. But in the end I made money, the sellers were happy, and I became such good friends with Ed and Eileen that my wife and I asked them to be the ministers at our wedding no kidding! These final tenants tore up the house, left owing money, and spoiled Ed and Eileen on the idea of being a landlord.
So, they were ready to sell. They happened to receive a personal letter from me expressing my interest in buying their rental house. At that time I often sent letters to long-time property owners in locations I liked. And she later told me she had a good feeling about me after we met. We actually met 2 or 3 times to get to know each other before I finally presented offers to purchase their property. I basically made two offers:. But the seller financing price was about what they hoped to net after paying real estate agent fees. So, they accepted my offer. For my part, the seller financing offer worked because it allowed me to hold a solid property longer-term as a rental.
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So, I needed an even lower price in order to make the property cash flow. So, we began renting the property. After the first tenant moved out, we found another who expressed interest in purchasing the house. It happened to be in the depths of the Great Recession. So we decided we needed the cash more than a long-term rental! And Ed and Eileen got paid their own chunk of cash at closing.
They used the money to pay off the remaining debt on their retirement residence. I went on to buy other properties with seller financing over the years. But they all shared a few key negotiating principles that I learned on this first deal:. The universe of people who may sell you a property is enormous.
But the type of seller willing to carry back the financing is much smaller.
So, you have to first understand who those people are before you start looking for owner financing properties. One time I reviewed all of my purchases where the sellers financed their property to me. But if you want to give yourself the best chance of buying properties with owner financing, I recommend that you focus on burned-out landlords first. A burned-out landlord is basically a rental property owner who has become fed up with tenants and all the other details of rental ownership. The common theme was that all of these burned-out landlords were motivated.
In most cases they had more business and investing experience than me! But they had enough motivation so that I could negotiate terms they may not have initially thought they wanted. And remember the pros and cons I explained earlier? Because these sellers were motivated, they were more receptive to listening to the benefits of seller financing especially after they got to know, trust, and like me.
And many of those benefits fit the situations of long-time landlords in particular. So if burned out landlords are your 1 type of owner who may finance a purchase, how do you find them?https://buipatsikecsle.tk
Here are a few ideas. There are many ways to find investment properties to purchase. But here are some ideas how to specifically find burned-out landlords who may be more likely to owner finance a property to you:. Contracts are central to successful real estate investing. This specialist can help you apply the general concepts and turn them into contracts that work within your local laws.
But as a negotiator of owner financing, you also need to understand the typical owner financing terms. This seems like an obvious one, but just know that there is always a relationship between price and terms. But there is no doubt you can sometimes pay a premium price depending on the other terms, like a low payment that allows you to cash flow an otherwise great property.