News & Views
By Rosalind Miller Choice, Licensed Real Estate Broker
INVESTORS BENEFIT FROM UNDERSTANDING AND USING SELLER FINANCING
Seller financing is an often used technique that remains a mystery to many real estate buyers and sellers. As a property owner understanding this type of financing can save you a great deal of money. Often times it can make or break your deal!
As a real estate buyer you should look for sellers who are willing to help you with the financing of the property they are selling.
When Jennifer wanted to purchase her first investment property, her first thoughts circled around her ability to finance the transaction. Her primary residence had appreciated significantly in value. She was able to secure an equity line of credit on her house, giving her access to funds.
The line of credit was a great financial starting point, in her real estate investment endeavor. Her Real Estate Agent showed her a 3-bedroom house in a quiet family-oriented neighborhood just in the shadows of the Delaware Memorial Bridge. She liked the house and realized it would bring in good rental income.
The amount of money she received from the line of credit came short of the sellers’ asking price. Undaunted, she made the owners an offer equal to the amount of the equity line of credit, but they rejected that offer. The owners wanted their initial asking price and would not reduce the price of the house. Jennifer wanted this particular house and realized she would have to satisfy the sellers.
The sellers were pleased with the fact that Jennifer had a significant amount of cash for the transaction; however that did not deter them from wanting their entire list price.
Both parties were willing to be creative. The solution was seller financing. The owners were willing to loan her the value of her shortfall.
They agreed that the sellers would give the buyer a "loan." The industry term for this is "holding paper".
The sellers and buyer agreed to monthly installment payments on the loan with an interest rate of 8.5%. The loan was to be paid off in 5 years. A Mortgage and Note were created.
In Jennifer’s case everyone walked away happy. At the closing, the sellers received all the cash from the equity line and a signed Mortgage and Note for the remainder of the amount due.
Jennifer has the property and a new career as a novice real estate investor. The sellers have sold their property and received asking price for the property. In addition, they will be receiving interest for the amount due. So in effect they sold their property for more than the asking price.
All of this information was recorded in the County Hall of Record Office. If the buyer defaults on the loan the former owners have the right to foreclose on the property—the same right a bank or mortgage company would have if they loaned the buyer the money.
Jennifer was buying a single family house, however this same technique can be utilized when purchasing larger properties ex. apartment buildings, strip malls or commercial facilities.
The beauty of Seller Financing is its flexibility. Almost all the clauses and terms are created by the seller and buyer.
There are no restrictions on how much Seller Financing can be created. I have seen mortgages and notes, on properties, from as little as $3,000 up to multi-million dollar contracts. The parties involved could agree that payments are to be made monthly, quarterly or annually. The interest rate is also based on what the buyer and seller can agree on. Some people, usually family members, charge no interest at all on these loans.
If you are a property owner who wants to purchase more property, but you may not have all the funding needed, consider asking for Seller Financing. Remember that you are involved in making the terms. Here are some clauses you may want to consider: no interest payments, or interest only payments for a period of time or deferred payments. It certainly would be nice to purchase a property and not have a payment due to the "lender" for a year. Just ask the sellers……….all they can say is no.
Rosalind Miller Choice is a Real Estate Investor and licensed Real Estate Agent. She is the owner of the National Note Exchange, a business that buys and sells cash flows including Real Estate Mortgages and Notes. If you have any questions you can e-mail her at email@example.com