How to Supercharge Your Rental Portfolio with Seller Financing
Wholesaling is all the craze today in real estate. Everywhere you look, someone is claiming to be a “wholesaler” (I hate that word, will get to that in a separate post), messaging you to JV, saying they have off market deals, oh and my favorite..emailing you, your own deals with a markup on the price. Don’t get it twisted, I use the strategy of wholesaling every single day but it’s one of many investment strategies I use to create income and build my rental portfolio.
What is Seller Financing?
One of the other main strategies I use is seller financing. Seller Financing is when a seller sells a buyer a home and finances a portion of the transaction.
For this example, Seller A agrees to sell me his house for $50,000. I propose for the seller to accept seller financing terms. The terms I outline are that I will put down a 10% down payment ($5,000) and the seller will finance the remaining balance of $45,000 at an agreed upon interest rate over a certain length of time. I always start off with sending over an offer that includes 0% interest to myself and a length of time that makes my monthly payment beneficial to me. The seller of course can accept my terms as written or counter.
Lets say for this example the seller agrees to finance the $45,000 at 7% over 7 years. I would have a monthly principal and interest payment of $679.17, the seller would receive that payment monthly for 7 years(unless we paid it off early) and that would be all profit to the seller (minus any servicing fees) When you buy a house with seller financing, the buyer owns the house. The seller is just the bank, like if you were to get a mortgage from Chase or Wells Fargo. Here is a good online calculator to find out the terms of your seller financing deal.
This means the seller is not responsible for paying taxes, insurance, repairs or any maintenance. The seller is just the “note” holder and the house is the collateral.
Let’s say you want to get more creative and have a lower monthly payment and refinance or pay the house off down the road. I could propose the same terms but ask the seller to have my payments on a longer amortization schedule. An Amortization Schedule, is the amount of time it takes you to pay off the loan in full based off a fixed monthly payment. I could set the amortization schedule on a 10 year period with a 7 year balloon. Now my monthly payment would be $522.49 a month instead of $679.17. In this scenario, there will be what is called a balloon payment due at the end of year 7. This means that at the end of year 7, I would have to either refinance the house to pay off the remaining balance, pay the remaining balance off in full or sometimes the seller will let you pay a fee to extend the loan for a certain amount of time. One thing to remember, the monthly payment we are stating is only principal and interest. As the buyer you are responsible for property taxes and insurance. So make sure to calculate these costs prior to agreeing to terms.
This is a great strategy to get lower payments up front to help a property cash flow as long as you are confident you can refinance or pay it off before the end of year 7. Seller financing is a powerful tool for a buyer and so many investors don’t know about it or don’t use it.
Another benefit I get, is that I get to stretch out my cash. I may have $25,000 in play to invest with. Instead of buying one house for cash, I could buy 3-4 houses by leveraging that $25,000 as down payments on seller financing deals. Most banks and hard money lenders won’t loan on homes priced under $50,000 so conventional or hard money financing isn’t an option. Your only option is to pay cash or get a seller to agree to seller financing terms.
There are two key documents needed to structure a seller financed deal; these are a mortgage and a note. These are the exact same documents you sign when you get a loan from a bank or mortgage company to purchase a home. These documents are signed by both parties, notarized and then recorded with the local register of deeds. This makes a record with the county that you and the seller have entered into an agreement for you to purchase the home and for the seller to finance a portion of the purchase.
This protects both parties in the transaction. The buyer can sell the home whenever they want, but the mortgage and note are recorded with the register of deeds, so that when a new title search is pulled it will show that the seller has a lien or interest in the property.
This outstanding mortgage balance would have to be paid off to the seller at close for the homeowner to sell the property. Also as the buyer you are the recorded home owner, so you get all the benefits of being a homeowner.
When it comes to seller financing, some look at it as a risky transaction, but if you take the right steps there is no more risk than any other transaction. Just like any other real estate transaction I do, I always use a title company or attorney to pull title work and insure that the title on the property is clear.
I buy or sell around 4-5 homes a month with seller financing. You would be surprised how many landlords are tired of being a landlord and dealing with tenants but would like to still collect some residual income on a seller financing deal. Tired landlords are my number one sellers I deal with when it comes to purchasing homes with seller financing.
There was a time when banks didn’t exist. If seller A wanted to sell to buyer B, they would create a promissory note, a form of consideration and use the house as collateral. That’s all seller financing is, two individuals agreeing to terms on a transaction. So while you are out there wholesaling, make sure you are learning the many other creative strategies to invest in real estate.
I always say “I wholesale to create income that will create residual income” and residual income comes from owning income producing real estate. Always ask the simple question of “Would you consider seller financing?” next time you talk that seller on the phone. Next time that seller is asking a price that doesn’t exactly fit your wholesale model, ask them if they will accept seller financing. The worst they can say is no, and you will be surprised how many actually would love to still collect residual income without the headache of being a landlord, paying taxes and dealing with tenants.
Aulston Group/JOG Investments