One of the most popular methods of using low or no money down when investing in real estate is using “seller financing.” Perhaps one of the oldest of “creative financing” methods we talk about here on BiggerPockets, seller financing seems to have become less and less popular in recent years – largely for reasons we will look at in this section. However, knowing how to effectively use seller financing in your business can help you get more deals done, faster, for less money – so don’t simply toss the idea of seller financing out the window. This post is going to show you exactly what seller financing is, how you can get use it in your investing business, and the dangers to look out for.
What is Seller Financing
Seller financing is just what it sounds like: the seller provides the financing. In other words, the owner of the property acts as the bank and, although legal ownership is changed hands, the payment is sent directly to the previous owner rather than a bank.
For example:
I want to purchase a particular rental house but do not want, or lack the ability, to get traditional bank financing. The seller would like $100,000 for the property, but is willing to “carry the contract” – which is investor jargon for someone who agrees to finance a property they own. The owner asks for $5,000 down and a 7% interest rate on the remaining $95,000 amortized over 30 years for a monthly payment of $632.03. I agree to his terms and after doing my due diligence, I close on the property through my local title company. I then look for a tenant who rents the home for $1400 per month and collect the cash flow difference each month.
In the scenario above, the seller gets a good, fixed …read more