Seller financing:
an outside the box money solution
Chances are you are visiting this site because you have an interest in seller financing. Maybe your interest is in learning how to build long term wealth with seller financed notes. Perhaps you're interested in learning how to buy a property without needing bank approval. Maybe you're tired of the responsibility of maintaining rental properties and are interested in learning how to sell them using owner financing to create passive cash flow income. Perhaps your interest is ....(fill in the blank).
No matter what you are trying to accomplish regarding creative real estate financing, you're limited only by your own creativity. Remember, it's your chalk and chalk board. As long as both you and the "other side" agree on the terms (provided no rules are violated), it can work. Best of all there are no bank approvals needed or many of the charged fees.
Whatever your goals are regarding creative seller financing, it can probably be accomplished without bank financing. It's not to say banks don't play an important role in real estate financing. They do! Banks actually provide the bulk of conventional financing. There are times however when seller carryback financing is a better solution.
Since everyone here is not a seasoned mortgage note holder, let's get on the same page and go through the basics of what seller or owner financing is and how it works.
How Does Seller Financing Work?
Seller financing is also known as owner financing, seller carry back financing, carry the note, creative seller financing or holding the note, to name a few.
As the name suggests, the seller or owner of real property finances the sale of their property. In essence the seller assumes the role of a bank wherein
the seller lends the buyer (borrower) the funds necessary to buy the property.
Now bear in mind, aside from the buyer's down payment money, the buyer and seller don't physically exchange cash when the seller finances the sale. Instead, the seller "lends" the buyer the equity the seller has in the property. As part of this "loan", the buyer gives the seller a promissory note and a mortgage
or deed of trust for the equity. As security for this note, a lien is placed on the real estate.
With seller financing, the buyer (borrower) pays back the seller's equity the same as a borrower would pay back a bank. Should the buyer default on this loan,
the seller can take the property back through the foreclosure process the same as a bank would.
Think for a minute, how a traditional real estate sale works: the buyer makes a down payment and goes to a bank or other financial institution for the
balance of the sales price. Provided the buyer successfully jumps through all the bank's lending hoops, the bank lends the buyer the necessary money to
complete the sale and in return the buyer signs (depending on which state the property is located) a mortgage note or deed of trust.
Seems like a win-win-win for everyone. The seller receives cash for the property. The bank creates a loan secured by the property. The buyer is now the
deeded owner of the property. Life is good in this typical scenario and works well for the majority of buyers and sellers.
Before everyone happily rides off into the sunset, we need to ask: what happens to those that apply for a bank loan but are turned down? After all not everyone
that applies for a bank loan is approved. There are several reasons why a bank will not approve a borrower which can include:
1. The borrower has poor credit.
2. the borrower has good credit but is self employed.
3. the property itself needs extensive repairs.
4. the property may not qualify such as vacant land or a mobile home on a large piece of land.
In our current economic environment of higher interest rates, banks are making it more difficult and expensive to get a mortgage. Stricter qualifying requirements and more fees make getting a bank mortgage a frustrating experience. Even a near perfect credit score is no guarantee you get approved. Does this mean that those not approved for a bank mortgage either have to pay all cash or rent for the rest of their lives? Absolutely not! It's time to consider creative seller financing.
Seller Financing: Want Verses Need
Ask any seller what they WANT when it comes to selling their property and the answer is always the same. The seller wants cash, a high price
and a fast closing. Now ask that same seller what they NEED when it comes to selling their property and you will get many different answers.
The want is always the same, cash, high price and fast closing. When it comes to seller financing the need is what matters. The need is the motivation of the seller. It's the real reason the seller wants to sell. This need can be as simple as needing money to buy a boat, a car, pay for college, a vacation or even pay off debt.
The amount of money the seller needs may only be a fraction of his equity but the seller thinks he needs to sell the entire asset. Could it be the seller is not
aware of the advantages of seller financing?
Seller Financing: A Money Problem Or A Real Estate Problem
Just as there is a difference between a seller's wants and needs, there is also a difference between selling due to a money problem and selling due to a real estate problem.
For example, an owner that is behind in his payments and faces foreclosure has a money problem. An owner that wants to sell her residence to buy another home and needs all the proceeds to buy the next house has a money problem rather than a real estate problem.
On the other hand, an owner that is fed up with tenant headaches and wants to sell to stop the source of stress has a real estate problem rather than a money problem. A family member that inherited a house or vacant land and doesn't want the property has a real estate problem.
Creative seller financing works best in those instances where the seller has a real estate problem rather than a money problem.
The point is, not every seller needs all cash, a high price and a fast closing. Think outside the box to solve the seller's need for selling and it can be a win-win.
Seller carry back financing might not be the solution for every situation, but it is a viable solution that can benefit both the seller and borrower
when compared to bank financing. Without question, most mortgages or deeds of trust are bank financed. Although seller financing is sometimes viewed as a
"fringe" financing method, many skeptics are surprised to learn that the amount of seller carry back financing dollars are in the billions with transactions
over 83000 (2022 figures)
The reason owner financing has such a large stake in the financing arena is simple. It's because there is a need. Seems this need for alternative financing
grows inversely to the banking industry's more stringent requirements.
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