Being a note investor creates multiple opportunities. In some cases, instead of buying a note, you may have the option to actually create a note. We call this seller financing.
What is seller financing?
When the owner of a property sells the property to a borrower and offers to finance or carry back the loan, that is considered seller financing. In other words, instead of the borrower having to go to Wells Fargo or Bank of America to get a loan, the seller is financing the property. The borrower will now pay the seller based on the terms of the agreement.
Challenges of Seller Financing
- This may not be a real challenge, however, the owner of the property should not have a lien on the property. In other words, the seller owns the property free and clear. Now, if there is a lien on the property there are other methods to sell the property with seller financing, but that gets into creative financing deals which is beyond this blog.
- You do not get a lump sum of cash from the sale of the property. This can be a plus or a minus, depending on your situation. If you are looking to sell the property and receive a cash payment from it then you should not consider seller financing.
- As with other notes, you become the bank and therefore take on the risks associated with being the bank. In some cases, the borrower may stop paying and you may have to foreclose. If the borrower does not pay the taxes, you may need to step in and pay the taxes to avoid losing the property. If the borrower does not have homeowners insurance you will need to cover your investment by getting force-placed insurance.
These are worst-case scenarios, but nevertheless, you should be prepared to handle these situations should they arise.
Benefits of Seller Financing
- Seller financing provides an opportunity for the seller to continue receiving monthly payments. For example, if the property used to be a rental property and the landlord decided to sell the property to the renter using seller financing, then the seller will continue to receive monthly payments.
- The seller is able to determine the terms. Although there are usury limits when it comes to the amount of interest a lender can place on a mortgage loan, the seller still has the opportunity to set the terms of the agreement. For example, you may sell the property for $80,000 with an interest rate of 9% and a term of 20 years. It can all be adjusted to benefit you and the borrower.
- As the individual bank, you have the opportunity to help people who do not qualify for traditional bank loans. They may not have a 20% down payment or they may have fallen on hard times and it impacted their credit, but they are still good people and they deserve the opportunity to become homeowners. As the individual bank, you can provide that opportunity.
Conclusion
Seller financing may not be for everyone. It just depends on your situation. There are benefits and there are challenges. Ultimately you have to decide what fits your financial goals.
