Seller Financing

There are basically two ways to finance properties:  Through a new mortgage or by the seller carrying the mortgage.  Everything else is usually just a variation of one of these two.

Sellers of investment properties in particular are often asked to carry the note. Why would a Seller consider this?

The most important reason is that the Seller will collect interest on the note.  If carried for the entire term of the note (say 30 years), the interest collected is usually 2-3 times the amount of the original note.  That is money earned on your investments just as rental income would be.  And, since you no longer own the property, you don’t have to worry about repairs, taxes or tenants leaving in the middle of the night.

But what if the Buyer defaults?  Things do happen and circumstances change. If the Buyer defaults, you are covered with a mortgage instrument that places a lien on the property.  You may have to go through a foreclosure process but then you will again own the property.  You can decide to hold it for a while or sell it again.  You could decide to again carry the note and continue to collect interest.

Let’s see how Seller Financing works.

First, the Buyer must be financially responsible.  Get their written permission to run a credit report and then do it. Some places where you can do this online include www.myfico.com , www.mrlandlord.com and www.thelpa.com . This will show you if they make their payments on time and if they have been in financial trouble in the past. 

Next, if there is an existing mortgage on the property the Buyer generally must put enough cash down to pay off that mortgage and any related closing costs such as real estate commissions.  A sample Seller’s Closing Statement is available below so you can estimate the costs you will have to pay at closing.

Once you have determined that it makes sense to go ahead, you will need to negotiate the terms.  It is not uncommon for the owner to carry properties and charge more than market rate interest.  After all, the Seller is assuming all the risk.  There is no large financial institution standing behind the Buyer and there is no pool of buyers to spread the risk around.

It is also common to amortize the loan over a long period of time – usually 30 years or so – but to require a “balloon” payment in considerably less time.  3-5 years is not uncommon.  By using a balloon payment method, the chances of default are small.  However, the amount of interest collected on the note will also be considerably less.

If you self-carry the mortgage on the property, you will be required to give the buyer the amount of principal and interest paid by them each year for tax purposes.  You will also want to make sure that insurance and taxes are paid by the Buyer if you don’t collect for them and pay them yourself.

We often tell Sellers that they can make more money by being the “banker” than they can by investing in other things. 

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