Seasoned Real Estate Investors Secret Tool Is Seller Financing.
As a real estate investor or even as a greenhorn just getting into the game you have probably heard the term “seller financing”. It is quite ambiguous from the surface, so there are some common misconceptions about it. It can be a very useful, efficient tool, but also very dangerous if not executed properly. In a nutshell, seller financing is when you as the buyer execute a closing/mortgage directly with the owner of the property. This means that there are no banks involved! How nice! You as the buyer become a debtor to the seller and have the responsibility of paying him/her the mortgage payment, as well as carrying all of the operating costs such as taxes, insurance, utilities, etc. This type of deal is rare because the property needs to be owned outright by the seller. This means that the seller can’t have a mortgage on it, and re-mortgage it out to another buyer. So, usually you are dealing with an older person who has owned the property for many years, or a person who inherited a property with no mortgage. In any case, if you can find this diamond in the rough you get some key benefits, but also some potent risks. Let’s go over them now!
No Bank No Problem.
The biggest benefit here is that there are NO BANKS INVOLVED; yet! This is important to you as the buyer because banks, nowadays, have many requirements, background checks, and legal red tape that you have no choice but to endure. When you are dealing directly with the seller the negotiation becomes very simplified. In addition, there is no appraisal or inspections needed!
The next benefit to mention is a segway off of not involving banks, and it’s the ability for you to negotiate + create your own terms. Seller financing terms will always vary from case to case so keep that in mind; no 2 deals are alike! A recent example is one of which one of our NVest® clients did just a few weeks ago. It was a 4 family property in Rhode Island in which the owner wanted $250,000. The buyer knew that this price was a little higher than what he should pay based on current market condition, but since he was doing seller financing he was able to negotiate a 30 year amortization payment schedule which then helped the deal make sense. This means that the mortgage payments are based on if they were to happen for 30 years, instead of the 25 year standard for investor commercial loans. After 5 years however the entire balance of the loan would be due. So, that is when the buyer would have to get a bank involved, and perform a refinance. This is where the bank takes a hold of the debt, pays the seller, and now the buyer has a 25 year mortgage with the bank. You see how that deal just fits like a glove?
Faster Closings And Less Red Tape.
On top of these benefits you also enjoy the luxury of closing the deal quickly. As we mentioned, there are no appraisals, inspections, or red tape to jump through. You just have to enact a closing attorney, have them prepare the mortgage docs, and go sign the papers! Very simple, and very quick! A seller financed deal can be closed within days or weeks, depending on the circumstances. That is much better than waiting up to 90 days for the snail-paced banks to close your deal!
Reward Potential Always Comes With Risk, Be Mindful.
So, you are probably thinking to yourself, “I only want to buy seller financed properties now!”. Well, yes, but no, sometimes! The problem that you will encounter with seller financed properties is usually that they need a great deal of work. That is typically why their owners are taking this route. If they need too much work then they won’t appraise properly, thus, not qualifying you for your loan. So, our point here is that seller financed properties often times are in serious disrepair, or have major environmental risks associated to them, such as being located on a brownfield. These factors usually disqualify them from traditional bank financing. You need to keep this in mind when constructing your deal. If you buy a property like this you will likely have a balloon payment due in 5-10 years. This means you will have to get a bank to refinance the property for you. So, if the property is not fixed/cleaned up properly you may end up defaulting on your mortgage terms and losing all your money! In addition to that you may have to give back the property to the seller! Very scary! So, the moral here is to ensure that you do not bite off more than you can chew.
If you have any other tips or pointers on how you have saved money as a landlord feel free to reach out to us on our website! We would love to hear from you!
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Gregory Rice is the Vice President of franchise sales for Nexus Property Management™.
Nexus Property Management™ is a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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