Do You Fully Understand How Seller Financing Allows You To Pay More?

Scott Costello All, Blog, Featured 8 Comments

Have you ever heard of seller financing?  I have.  In fact investors always talk about it as a great thing which makes properties oh so more attractive to your buyers.   I understand the basic concepts and the mechanics of what seller financing is, but what I never really grasped was how can an investor pay more for a property using seller financing then they could by paying cash for the property.

What is Seller Financing?

For those that aren’t quite clear on what seller financing is, it’s when the seller of the property agrees to take payments for the property, spread over a period of time, instead of one large payment.  You basically are getting a mortgage from the seller instead of a bank.

For more information plus the pros and cons of seller financing go to wikipedia

 

How Can Seller Financing Allow You To Pay More?

This is a question that I’ve been wondering for the longest time.  I’ve asked some people here and their over the last few years but the answers where way to complicated for my small brain to comprehend.  If you don’t explain things in examples, I can’t following along to well.

I still may not understand it completely, but my brain is slowly putting the pieces together to the point where I understand the general concept (I think) but if I think about it to much i confuse myself.  Ever have that happen to you?  Happens to me…

I actually spent the last 20 minutes trying to explain my understanding as part of this post but I started to confuse myself and would have certainly confused anyone reading.  With that being said,  I would greatly appreciate someone, who knows about seller financing, explain how it allows you to pay more money for a house to me or point me in the direction of where I could understand it better (with examples).

 

 

 

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Comments 8

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  1. here are a couple of things to consider.

    rehabber finds a house to fix up. a hard money lender would charge him a couple of points and 12% interest or more for the money. instead, the rehabber offers the seller a few thousand dollars more than the “all cash” price if the seller will take a downpayment (maybe 10 or 20 percent) and carry the balance on a no-interest, no payment note, due when the rehabber resells the property. this “few thousand dollars more” should be less than the points, fees, and interest that the hard-money lender would charge.

    think of this: at 5.2%, the total of payments on a 30 year fixed rate note will be double the principal balance. in other words, the total of all the payments on a 100K loan at 5.2% will be 200K. With this rule of thumb in mind, i might offer a seller 120K for a house i would only pay 100K cash for, if they will carry back a mortgage with a payment that will generate a cashflow today. if this is a good house that i can see myself keeping as a long term investment, the *terms* (ie a mortgage payment low enough that the rents will cover them plus a profit) are more important than the *price*.

    an extreme example, just for kicks. you have a house that is worth 100K. i will pay you a million dollars for it, payable at $100 per month until paid, on a non-recourse note. can you make money on a house that you can control for $100 a month with no personal liability? of course you can!

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      Chan,

      Thanks for the great comment and explanation! It certainly helps clear up some of the questions in my head. One of my investor friends was trying to explain how he tries to “Control” the property and I think your examples helped me understand his points a little more. Thanks,

  2. Scott –

    Have you checked out the SAFE Act of 2008? It pretty much put a halt to seller financing unless you are a mortgage lender or are selling to your immediate family. You can google it to get all the info.

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