Today I’m answering your question, “What is a Fair Interest Rate for Seller Financing?” and the topics I’ll be covering are:
- Seller Financing in Real Estate
- Real Estate Financing Contracts
- Buying Properties at Tax Auctions to Seller Finance
- Risks and Rewards of Property for Sale by Owner Financing
- How Does Owner Financing Work When Buying a House?
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Seller Financing in Real Estate
Using seller finance offers many benefits for both buyers and sellers, and for real estate investors, financing is the key to success.
For the most part, the government controls the interest rates which go up and down depending upon the administration.
Observers of these changes adjust their buying and selling strategies to correspond to and take advantage of the interest rates. Sounds complicated? We’re going to make it easy.
I’m Ted Thomas, and I’ve been investing in a subset of the traditional real estate business for over 30 years. I invest in tax lien certificates and tax defaulted property which for most people is a complete mystery, but don’t worry, I’ll get into the details of that.
To start with, real estate will slide into a recession without financing of some sort because the majority of buyers need help from financers to purchase property. That’s why we’ll be discussing, what is a fair interest rate for seller financing?
The United States had a long history of difficult real estate markets until Congress created government loans that could be amortized for over 30 years. Prior to the 30-year real estate loans, investors were only allowed one year to pay them off. At the conclusion of the year, there were big problems.
Today I’m discussing owner financing which can be a huge profit center and dealmaker for owners selling in the real estate market. Owner financing simply means the seller will be the bank for the prospective buyer. This opens many doors for buyers and sellers.
Owner sellers, especially senior citizens who are downsizing, may sell their property with installment sales. This gives them a secure income and also allows a buyer to close the sale quickly and not wait for slow-moving institutional lenders.
Real Estate Financing Contracts
Experienced real estate people know that mortgages are common in the eastern part of the United States. In the western and southern parts of the USA, many homes are sold on a lending document called a trust deed or deed of trust. Meanwhile, in the middle part of the county, sales of real estate are completed using a contract for deed which is a common installment contract.
Most people are familiar with Home Depot and Lowes stores that sell hardware and household items. Many of the buyers at these stores may purchase large ticket items via an installment sale. It’s the same in real estate.
Banks and financial institutions establish the rates which are usually high and require significant down payments. Sellers and buyers can create their own rules if they use their own installment contracts. This allows young people to purchase property with less than 20% down payments.
Contracts for Sale
A contract for sale is simply an installment contract and a real estate contract all wrapped up into one. The buyer and seller agree on the interest rates and terms, like how many years.
What is a fair interest rate for seller financing? The seller financing interest rate must comply with usury laws which prevent a seller from charging too much. These are state laws, and you can go here to view the usury limits of each state.
The real world of sales reveals thousands of homes are sold everyday with seller carryback financing. That simply means that the seller accepted a down payment; the buyer accepted a contract with installments, and both parties agree to the situation.
Buying Properties at Tax Auctions to Seller Finance
In the tax defaulted real estate business, we make our money when we buy at the tax auctions. The objective is to buy at the lowest price possible and then resell into the market place for a generous profit.
These auctions are happening in all counties across the United States. Tax defaulted properties are sold mortgage-free with starting bids of just the back taxes. The highest bidder wins the auction.
Savvy tax defaulted property investors purchase real estate for 10 or 20 cents on the dollar of the assessed value then resell the property for 50 or 60 cents on the dollar.
I have a free gift for you that will show you how to profit with tax lien certificates and reveal the secrets of tax deed investing, and I’ll also include an auction list. Get it all now for FREE.
Risks and Rewards of Property for Sale by Owner Financing
As a tax defaulted auction buyer we sell to people who are rejected by banks. We appeal to the 25% of the market that has a less than pristine FICO score, and the banks reject them due to poor payment history, recent divorce, or recent bankruptcy. All of these people are rejected even though they may have good jobs and cash money.
How risky is seller financing? Since we’re selling to people with poor credit ratings, is owner financing safe?
Here’s how we reduce the risk. We sell the tax defaulted property with seller financing using an installment contract, and the buyer must make all payments before receiving the deed to the property. Hanging onto the deed mitigates the risk. They get a second chance, and we are highly paid.
Seller financing is the key. It’s easy to sell if you buy low, sell low, and create installment contracts.
How Does Owner Financing Work When Buying a House?
How do you negotiate a seller financed deal? Here’s an example of how to do a seller financed deal on a tax defaulted property.
The tax assessed value of a home is $100,000. The county treasurer has confiscated the property for non-payment of taxes, posted the property on the local county website and announced the tax defaulted property auction in the local newspaper.
Starting bid at the auction is $10,000. This low starting price attracts fixer-uppers and bargain hunters. Ultimately, an investor pays $30,000 at the tax defaulted auction for this property that was tax assessed at $100,000.
The investor understands marketing and advertises the property on the MLS, eBay, Craigslist, Zillow, Trulia, Facebook Marketplace and dozens of auction sites as “bargain hunter special, assessed value $100,000, must sell for $70,000.”
A buyer notices that $70,000 is 30% below the tax assessed value and offers $70,000 with a down payment of $7,000. However, the new buyer has a poor credit history. The seller offers an installment sale.
What are good terms for owner financing? What is a fair interest rate for seller financing? The interest rate is going to be higher than what a bank would charge, but in compliance with usury laws. Who pays property taxes on owner financing? The new buyer must pay taxes, maintenance and insurance, and for this example, a $7,000 down payment and $900 monthly installment payments for 10 years.
That’s 120 months at $900 which comes to $108,000, plus the $7,000 down payment for a total of $115,000.
We hope you enjoyed Ted’s lesson, “What is a Fair Interest Rate for Seller Financing?”
Interest rates should be in compliance with usury laws which vary per state, but the interest rate can be more than what a bank would charge for a home loan when the seller is financing a buyer who has a poor credit rating.
If you’d like to learn how to reap huge rewards from tax delinquent property investing, Ted Thomas provides full support and complete training with home study courses, Q&A webinars, live tutorials, workshops, web classes, and personal coaching with certified coaches.
Get started today by taking advantage of this Free Gift from Ted. Act now, it costs you nothing and will give you a big head start!
Ted Thomas is America’s Leading Authority on Tax Lien Certificates and Tax Deed Auctions, as well as a publisher and author of more than 30 books. His guidebooks on Real Estate have sold in four corners of the world. He has been teaching people just like you for over 30 years how to buy houses in good neighborhoods for pennies on the dollar. He teaches how to create wealth with minimum risk and easy-to-learn methods.
Ted Thomas is not an attorney at law or broker and not giving legal advice, but merely discussing basic loan strategies and techniques.