What is Seller Financing & How to Use It To Buy Real Estate
In today’s blog post we are going to be talking about seller financing which is a real estate investing financing strategy to help you fund real estate deals if you’re having trouble qualifying for bank loans.
One of the common questions I get is what do I do if I can’t qualify for a loan yet?
Getting bank financing can be quite challenging especially if you’re young or recently been in and out of jobs or you are an entrepreneur running your own business.
There are a lot of guidelines and qualifications to getting bank financing and this can eliminate a lot of buyers from the real estate market as they have to fix their credit score and meet the income qualifications first.
If you’re looking to get into real estate investing and looking at alternative financing strategies to buying properties in your real estate market, I’m going to share with you seller financing.
Resources:
- Real Estate Investing School: How to Retire on Passive Income
- Flipping Houses Made Simple
- Rental Properties Made Simple
- Personal Finance School: How to Maximize Money
What is Seller Financing?
Seller financing is one of the best real estate financing strategies and it’s basically just going to the seller and asking if they would act as the bank and loan you the money to buy you the property. You’d pay them back over time like you would a bank, paying them monthly payments.
When you’re finding a deal on the market for sale, all you need to do is reach out to the real estate agent representing the seller and ask the agent to contact their seller and ask if they would consider seller financing.
In Zillow, you can find a filter to search by keyword and type in the word “Seller Financing” to see if any listings pop up where the listing already has those words in the description. It will eliminate most of the listings and keep just the ones for sale that mention seller financing in their property description.
So that’s one way you can get started screening for seller financing deals.
Example Seller Financing Deal
Let’s say we found a property for sale and we want to submit an offer. In our purchase agreement contract we can specify our financing terms that the purchase will be conditional on. If these terms aren’t met, we have a way to back out of the deal legally without losing our deposit.
In the financing section, we would write down the loan term (2 years, 5 years, 15 years, 30 years, etc.) as well as our interest rate the loan will not exceed (5% for example).
I recommend using a shorter loan term like 2-3 years so you can give yourself some time to get things straightened out with the bank and get qualified for a bank loan that will replace the seller financing loan with the seller.
It also is attractive to the seller because they know they’ll be getting paid off sooner and don’t have to wait 30 years to get paid off.
The seller may need that lump sum of money to use on a future purchase like a vacation home or new car and might not like having it tied up as a loan to you for a long term period.
With interest rate, we can negotiate it with the seller later but for now put a lower interest rate like 3% and let the seller counter offer you back with a higher interest rate if they think 3% is too low.
Ideally, a seller is okay with an interest rate comparable to what you could get at the bank for a housing loan, but they may request a higher rate that is 1% or 2% higher than the bank’s rate.
Your argument could be that 3% is still way better than the interest rate they would be getting if their money was in a savings account at the bank earning 0.10% to 0.25%.
How Much Money Do You Put Down on a Seller Financed Deal?
Since you’re not working through a bank, their isn’t really a minimum requirement for seller financing loans. That is up to the seller how much they feel comfortable taking as a minimum down payment.
This could be $0 or it could be 10%. Just talk and negotiate with the seller. If you don’t have much money saved for a down payment, maybe suggest paying them a higher interest rate in exchange for doing a lower down payment or a zero down payment.
If you’re struggling to save money towards a down payment each month, try these 17 extra income ideas from my YouTube channel