Welcome to a quick overview of Seller Financing

Why would a seller agree to wait to get paid and do a carry back

loan? There are 2 main reasons.

Reason #1: The Seller Gets A Higher Purchase Price:

The first reason is the seller gets a higher purchase price. Remember,

whenever you buy real estate on terms or using creative financing,

you pay more than a cash transaction. In exchange for waiting to get

paid in full, the seller gets a higher price.

This is also beneficial to you the investor because now you don’t have

to raise the capital and come up with most or all of the cash to buy

the property. To help illustrate this point, let’s do a comparison of a

cash offer vs a seller finance offer. 

Reason #2: The Seller Gets Cash Flow

In addition to getting more on the price, the seller also earns cash

flow from the interest on the loan payment you make each month.

Three Seller Financing Terms

Term #1: Down Payment

The first is a down payment. It is possible to get the seller to carry

100% but most sellers will want you to have some “skin in the

game” or in other words, they want to make sure you’re financially

committed to the deal. This is typically 5-10% down.

A work around to the down payment is using the rehab funds as your

skin in the game in lieu of a down payment. For example, we have a $15,000 cost of repairs. Explain to the seller that you’re going to spend $15,000 renovating the home, which will increase the equity or value of the home and also count as your skin in the deal.

You could even offer to put the $15,000 in escrow at closing to be

used for the rehab to make the seller feel more comfortable that

you’re going to do the repairs.

Term #2: Interest Rate:

The 2nd term is the interest rate. Now if you plan on keeping the

property long-term, negotiate a low interest rate. If you’re planning on

flipping the property, interest rate isn’t your primary concern because

you’re only going to hold the property for a few months so use it as

leverage when negotiating the terms.

For example, instead of 5% for a long-term rate, offer to pay 8%

interest with $0 down because paying 8% instead of 5% for a few

months, until you flip the property is worth it to not have to put 5-10%

down and tie up the cash.

Term #3: Loan Due Date (Balloon):

The 3rd term is when the loan has to be paid off. Typically, the

payment is amortized over 30 years but a seller doesn’t want to

carry the loan for 30 years so they’ll have a date when it’s due, called

a balloon. This could be 1 year, 3 years, 5 years or whatever you

negotiate.

If you want to hold the property long term, get as high a balloon as

you can. However, if your goal is to flip the property, and you plan

on only holding the property a few months, use this term to your

advantage when negotiating. For example, offer 8% interest, $0 down,

with a 1 year balloon (which is plenty of time to flip the property).

The hope is the higher interest and shorter balloon will off-set the $0

down with the seller.

Once you’ve agreed on the terms and they are spelled out in the

purchase and sale agreement, you could pay an attorney to draft the

paperwork but seller carry deals are pretty common and I usually

have the title or escrow company do it for me.