WHAT IS SELLER FINANCING IN REAL ESTATE?
Are you wondering what is seller financing in real estate? Most veterans in the industry will know that this is the way to go if you want to make money! So watch this video to understand this important concept!
If you are a real estate investor, you probably wonder what is seller financing in real estate? In simple terms, you are the owner and you are selling the property. Seller financing means you are the bank, the real estate agent and the real estate broker.
It is a lot like selling your car, lawnmower or computer. Since it is real estate, you do have to jump through a few more hoops to comply with federal and state law. Maneuvering through the sale process is easy once you know the rules and do your homework.
Many people who invest in tax liens become property owners and wonder what they can do with the property. I’ll explain the difference in tax lien certificates and tax deeds in this article.
Buyers wonder if they can sell the house they now own. What is required to sell the house? What rules are involved? What are the benefits and drawbacks to selling a house without a real estate agent?
As the owner, you can do a lot with it. You can rent it, use it or sell it. If you sell it yourself, you save fees and commissions and you keep any profit generated by the seller financing you provide from the interest on the mortgage loan.
When you offer owner financing, you get a cash flow instead of a lump sum.
Here are the most frequently asked questions (FAQs) and answers about seller financing in real estate.
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How Do You Sell a House Without an Agent (aka FSBO – For Sale by Owner)?
Some people think you must have a real estate agent to see a house. You do not. So how do you sell a house without an agent? You do it for sale by owner (FSBO). It is your property. You do not need someone to help you sell it. You just need to set a price and then advertise the property.
Setting a price is simple. Use the real estate guide Zillow. Zillow is an important tool in your toolbox when you become a tax lien investor. When you sign up for my investing courses, you get access to videos that teach you much of what you need to know about using Zillow.
Here is an example. Pasco County, FL., scheduled a tax deed auction in late September 2021. Learn about tax deed auctions in this free article “What Is a Tax Deed Sale? A Bargain Hunter’s Dream! on my website. One of the properties listed for sale was 7807 Bolam Ave., New Port Richey. The County Tax Assessor said the property was worth $140,001.
An assessor is looking at property for tax purposes. If they set the amount too high and get challenged over that value estimate, it could cost the County a lot of money. Because of that, tax assessors will sometimes set the value a little bit low. Other state laws may affect how the property is valued.
The Zillow estimate of the property says it is worth about $210,000.
At the Pasco County sale, the property had an opening bid of $10,109.36. Say you went to the auction and bought the house for $100,000 because the price was bid up at the sale. After you got the deed for the house, you could sell it for $180,000, which is $30,000 below the market value and still pocket a $30,000 profit. If you use seller financing, you make even more.
Just as a rough guide, you finance the whole $180,000 for 30 years at 2.98% interest, the average mortgage rate when I wrote this article. Payments are $756 a month, not including insurance and taxes. In 30 years, you pocket $272,160, a big $172,160 profit on the interest paid.
With the price set, then you advertise the house. The best ways to do this are:
Craiglist – Craiglist is the Internet’s version of the classified pages in a newspaper. Ads here are free. Look for the state where the house is located and then the nearest Craigslist community. Look at related real estate ads for that community to see how to phrase your ad. Be sure to make For Sale By Owner and Owner Financing prominent. Other places you can list the property online are eBay, Zillow and Facebook. HomeLight Real Estate has an excellent article “Selling a House on Craigslist” on the pros and cons of listing your property for sale on Craiglist.
Newspaper classifieds – Most newspapers have an online version. Their classified page is an excellent place to list your house for sale. People can search past issues of the paper, looking for FSBO and Owner Financing houses. The drawback is this is not free and people need to go to the newspaper website to search.
Signs – Put a FOR SALE BY OWNER sign in the front yard. Add your phone number and wait for the calls to come in, we have many classes on ugly signs and selling.
No matter how you advertise the house, you must set aside time each week to show it to prospective buyers. If you can, put a bunch of pictures online; your Facebook account is a good place. Pictures will help buyers decide if they really want to see the house in person. Of course, we also teach people to have their own property web site.
How to Sell a House With Owner Financing
A critical part of selling a house with owner financing is following the various real estate laws. You must follow federal law and whatever other state law is in place where the property is located.
The most important federal law you must know is the Fair Housing Act. The Cornell School of Law summarizes the law as follows: it “prohibits discrimination in real estate transactions on account of race, color, religion, sex,or national origin.” In other words, if you are selling a house, you have to sell it to anyone who has enough money for the downpayment, enough income to make the payments and good enough credit to qualify for the mortgage terms you state.
To stay on the right side of the law, your mortgage offer should be the exact same for everyone who offers to buy your house. If you start changing your offer, someone could accuse you of violating the Fair Housing Act.
Another part of federal law that is very important is disclosure. Disclosure means you tell the buyer about the condition of the property, including any problems. If the buyer asks you something, you have to answer truthfully.
If the buyer finds problems later and you knew about them, the buyer can force you to pay the repair costs. If you mentioned the problems before the contract was signed, you are not liable. I suggest you put any issues in writing so no one can question whether or not you knew and mentioned them. The respected real estate guide Nolo has an excellent report on disclosure and how to comply.
Some states, like California, add to the disclosure law. Real estate broker Marsha Gray answers real estate-related questions in the Santa Barbara Independent newspaper.
She has this to say about the Golden State’s disclosure law, “It is the Granddaddy and Big Boss of all disclosures. The TDS (transfer disclosure statement) is a statutory disclosure, which means it is required by the State of California and cannot be waived by the seller or buyer. If the buyer has released all contingencies — loan, physical inspection, and appraisal — and the seller presents the buyer with additional information for the TDS, the buyer now has five days in which to cancel the sale and receive all deposit monies back. It’s important.”
If you plan to do owner financing, then you need to know about the Truth in Lending law. The US Treasury Department oversees this law. Truth in Lending means you have to tell the buyer about:
- Any fees associated with the loan
- The interest rate
- The total cost of the loan
The Treasury Department has a more detailed explanation here.
Every state has different laws regarding the sale of real estate. The legal information website Findlaw has links to each state’s body of real estate laws. Just find the state where the property is located and go from there.
Here is an example showing differences in states’ real estate laws.
Alaska has very limited laws regarding fences. As Findlaw states, “While some states have passed laws governing fences that run along property lines, Alaska law doesn’t choose to regulate these types of fences.”
On the east side of the nation, Connecticut has a body of laws about fences and how they may be put up and maintained.
As a person selling property, fences matter. A fence becomes a property line over time, whether that fence is actually on the property line or not. Sometimes a property survey is the only way to tell if a fence is in the right place.
In Southern Pines, N.C., a lawsuit saw the County Commission sue some property owners over a fence. The County argued the fence blocked access to County-maintained utilities and was a “spite fence.” A spite fence is a barrier put up to annoy a neighbor or block that neighbor’s view or access. The final decision in the case was for the homeowners. Even though they won, they still had the expense of hiring lawyers to defend their case.
Pro tip: Hiring a real estate attorney to handle and write the contracts and mortgage paperwork is an excellent idea. The attorney knows the laws and will guide you through all the steps you must follow. Some states even require a real estate attorney to process the paperwork. LemonBrew, a real estate finance company, keeps a list of the states that require an attorney. A quick Google search using the words “real estate attorney” will give you a list of lawyers.
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What Is a Fair Interest Rate for Seller Financing?
Interest rates on mortgages bounce up and down constantly. The interest the buyer pays also depends on his credit rating. Better credit means lower rates. As the credit rating gets worse, the interest rate goes up. So what is a fair interest rate for seller financing? That depends on several things.
- Credit score
- Down payment
To get a person’s credit rating or score, run a credit check on the buyer. This is legal. You must get the person’s permission to run a credit check. You can create a credit check form with this website. Experian, one of the big three credit reporting agencies, explains more about how to run a credit check on someone in this article.
The better the credit score, the better the interest rate you should offer.
Running a credit check does cost money. You can pay that cost or ask the buyer to pay part of all of it. The fee runs from $20 to $50. Asking a prospective buyer to at least help pay for the credit check is an excellent way to eliminate “tire kickers” or people who have no real interest in buying your house.
If the person agrees to pay, you can always refund the money or turn down the offer. If the person refuses to pay for the credit check, then you can refuse to show them the house.
The more a buyer invests as a downpayment, the more secure your investment will be. A buyer who can put down $50,000 is far less likely to walk away than someone who puts down nothing as a down payment.
Part of buying and selling real estate is negotiation. In owner financing, you are also trying to come up with a down payment and a monthly payment you both can agree on. So a good way to figure out a rate is to find out what the buyer wants to spend each month. Be sure to include taxes and insurance in the monthly amount.
You can take the payment, less the taxes and insurance, and work the math backward to get the interest rate. If the interest rate is not enough to suit you, tell the buyer the payment has to be more.
The finance and business magazine Forbes says interest rates in owner financing are often more than a conventional mortgage.
For someone with excellent credit, offering a rate a bit above the average rate is a fair deal. If they do not like your rate, they can apply for a conventional mortgage. As the person’s credit gets worse, increase the interest rate.
Have your interest rate, credit score requirements and payment amounts written down ahead of time. Stick to that schedule. Making the same offer to everyone makes sure you stay on the right side of the federal Fair Housing Act.
Here is an example:
Credit rating 700 and above with a 10-20% downpayment – Average mortgage rate plus 2 percent. For instance, if the average rate is 3%, then your interest rate is 5%.
Credit rating 600-700 with a 10-20% downpayment – Average mortgage rate plus 4 percent. For instance, if the average rate is 3%, then your interest rate is 7%.
Credit rating 599-500 with a 10-20% downpayment – Average mortgage rate plus 7 percent. For instance, if the average rate is 3%, then your interest rate is 10%.
Credit rating below 500 – I do not recommend owner financing in this case unless the buyer can explain why the rating is so low. Some people do have legitimate reasons for a low score.
Is Seller Financing a Good Idea?
If you are looking at carrying a note…this is really an installment sale for a house, you have to ask yourself, is seller financing a good idea? Like so much else in life, the short and most correct answer is: It depends.
Among the benefits you get by financing the sale is you earn the interest instead of a bank or mortgage company. In most cases, the buyer pays more money in interest in a 30-year mortgage than the house’s purchase price. That is profit right into your pocket.
You do not have to pay real estate agony commissions or fees.
You set the purchase amount and terms.
You set the closing time and cost.
Monthly mortgage payments mean your tax debt profit on the sale is spread out over the life of the mortgage.
If the owner defaults on a mortgage or trust deed you have to go through a conventional foreclosure. Foreclosure is more difficult than eviction.
Using contract for deed which includes a promissory note and installment payment is also legal and will save you extensive legal fees as a default triggers an eviction. Every state has different rules for the process foreclosure, so hiring a real estate attorney is a good idea.
Unless you can find someone to buy your seller financing contract, or the owner pays off early, you own a long-term investment.
On the Ted Thomas YouTube channel I have other videos on owner seller financing.
“What Is Seller Financing And How Does It Work?”
“How To Buy A House With Seller Financing”
“How Does Seller Financing Work For a Seller?”
How Does Owner Financing Work When Buying a House (not as a seller) i.e.: How to Do Owner Financing on a Home you’re buying?
If you are a buyer, you need to know how does owner financing work when buying a house. The process is different than applying for a conventional mortgage. Here are some of the major differences:
1. You deal with one person, the owner, instead of a committee at a bank or mortgage company.
2. The paperwork requirement is a lot less. You will still have to give approval for the owner to pull a credit report. Be ready to explain any negative items on the credit report. Be ready to show proof of income to prove you make the payments.
3. The downpayment, interest rate and length of the loan are negotiable. You should expect to pay more interest than with a traditional mortgage. To some extent, the monthly payment is also negotiable.
4. You may have a balloon payment at the end of the agreement. This may be negotiable.
5. You will not work with a real estate agent.
6. Who pays how much of the closing costs is negotiable.
Some things that remain the same are:
1. You pay insurance and taxes. Make sure you can afford these on top of the regular mortgage payment. If you do not maintain insurance, the owner can take out a policy and add that to the cost of the mortgage.
2. The bigger your downpayment is, the less your monthly payment will be.
3. If you fall behind, the owner can foreclose and take your house.
4. Having a real estate attorney draft the sales contract and help with the closing is a good idea.
5. Any property covenants still apply.
6. You, as the buyer, are responsible for all the upkeep, maintenance and repairs.
Seller financing is a good thing if you have less than stellar credit. You can explain to the owner what happened and why your credit is not where it should be.
The legal information website has two articles discussing seller financing
We hope you learned a lot from Ted’s lesson, “What Is Seller Financing in Real Estate?”
Seller financing offers a lot of benefits to both buyers and sellers, and it’s a process that’s much simpler and more streamlined because it cuts out the middlemen. Costs are reduced, more restrictions are removed, and both parties are freer to negotiate without the middlemen in the way.
What is seller financing in real estate if you’re the seller? In this case, you’re selling the property yourself on an installment plan. You’re the one collecting the interest on the payments instead of the bank, and you’re benefiting from the tax debt profit on the sale being spread out over the life of the contract.
A lot of would-be home buyers aren’t able to get a mortgage from their bank due to having an inadequate credit score despite earning enough income to afford to make the payments, and many of these people are excellent candidates for a homeowner offering seller financing. So as a seller doing an installment sale, you’d have plenty of prospects.
The rest comes down to negotiation. What will the downpayment, interest, monthly payment, and length of the contract be? The higher the downpayment, the less risk to you as the seller. The lower the buyer’s credit score, the higher the interest rate can be. It’s up to you and the buyer to determine the best terms for both of you, and ultimately, as the seller, you’re in the driver’s seat. You decide what you’re willing to accept.
Seller financing is an excellent way to sell a home quickly without discounting the price, and it produces a stream of income for years to come.
What is seller financing in real estate if you’re the buyer? It’s a way for you to become a homeowner if you can’t get a mortgage from a bank. You may be able to negotiate a deal with the seller that suits your budget, however, be prepared to pay more in interest.
Though installment plans are sometimes called rent-to-own, you would not just be a renter. You would have responsibilities associated with home ownership, like taxes and insurance and paying for the upkeep of the property, maintenance and repairs.
If you dream of owning your own home, but your credit rating is your biggest roadblock, then finding a seller willing to do the financing could make your dream come true.
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