THE PROS AND CONS OF SELLER FINANCING
Seller financing is when the owner of a property that is for sale holds the loan to you (the buyer), instead of a bank or traditional lender. It can be an excellent way to acquire a property by skipping the red tape and delays that come with traditional lenders and in that way can be much more convenient. While there is certainly upside to investing with this type of arrangement, it is not without its risks.
THE BIGGEST BENEFIT
The most attractive aspect of seller financing is that you have the ability to negotiate and create your own terms. At a traditional bank they set all of the terms and conditions themselves and you accept them because you need their money. But, with seller financing you get to negotiate everything: purchase price (obviously), down payment, interest rate, and repayment terms, and amortization schedule.
If you’re looking for financing with a traditional lender you can expect a down payment of 25-30% and an interest rate of around 6%, with a 25 year amortization schedule. If that’s what they’re offering, that’s what you’re going to get, and there will be very little variance from one lender to the next in a given area.
LEARN MORE: HOW RENTAL PROPERTY INTEREST RATES ARE CALCULATED
With seller financing, you can negotiate much more favorable terms than what those banks can offer. Obviously, the seller needs to be on the same page, but the fact of the matter is clear: seller financing allows for negotiation, which is essential in establishing terms that are more favorable to whatever your financial situation might be.
ANOTHER SIGNIFICANT BENEFIT
The other major perk of finding a seller who will finance themselves is how much quicker and painless the process will be. While closing with a bank or lender can take months, you can close quickly, in a couple weeks and sometimes even in a matter of days. Banks, by nature, are very cautious and are always guarding against risk. In that approach, they are highly inefficient and the closing process is painfully slow.
LEARN MORE: WHY DOES IT TAKE SO LONG TO CLOSE ON A RENTAL PROPERTY?
While closing on a rental property can take as many as 13 individual steps, with seller financing there are just three necessary components: 1) a down payment, 2) a contract, and 3) a closing. A nice, easy, legally binding agreement that both sides agree to.
WHAT’S THE CATCH?
Yes, there is a catch and you may need to be careful. The reality is that properties where seller financing is offered more often than not were unable to get a loan by traditional lenders. There might be an enormous amount of work needed or a major, expensive need like asbestos abatement, fire safety system, lead paint, and beyond. Whatever it might be, there’s some reason the seller is going this route and just expediting the timeline is not it. The reason the seller would agree to your negotiated terms is because you are assuming all risk once the deal is done.
LEARN MORE: THE TRUE COST AND VALUE OF REAL ESTATE INVESTMENT
NEXUS’ HQ STORY
In July, 2014, Nexus Founder and CEO, Nick D’Agnillo purchased a 60,000 square foot industrial space in downtown Pawtucket for $175,000 with the goal of turning it into Nexus’ franchise headquarters. The building had previously been a furniture store and before that housed 19th century horse carriages. The building had seen a lot…and it looked like it.
Nick bought the three story property with the help of seller financing. For two years, our maintenance team helped clean it up and make necessary repairs. We were then able to refinance and get a traditional loan, which allowed us to fully pay off the past owner. D’Agnillo took advantage of the terms he could get through seller financing and with hard work and dedication, turned it into a win-win for the company and that seller.
LEARN MORE: A TYPICAL INVESTING EXPERIENCE FOR A TYPICAL NEXUS CLIENT
CONCLUSION: PROS AND CONS
While seller financing can certainly work for you as a buyer, it is not without its risks. If you are up against a balloon payment and are unable to refinance (as Nexus was able to do), you could have a difficult time depending on the payment schedule you’d agreed to…but no matter what, you’re going to have to pay at some point, and if you can’t upgrade the property so it’s creating revenue or has enough added value to refinance, it’s going to be very difficult. Once you enter into a seller financed deal, you could potentially lose it if you miss just one payment. While seller financing is much more convenient on the front side, it could be more painful on the back end.
Want to learn more, or interested in becoming a client? We encourage you to reach out to our team for any and all of your real estate investment needs.
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Mick Lefort is the Vice President of Operations for Nexus Property Management®. 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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