Some seasoned and beginning investors are not aware there are multiple creative options other than traditional bank loans for purchasing investment properties. One such method is ‘Seller financing”. Just as the name implies, the person selling the home lends the buyer the money instead of a bank. A promissory note is executed by the buyer and seller with the details of the loan such as interest rate, payment schedule and what happens if the buyer defaults. Payments go to the Seller unless the loan is purchased by someone else.
Seller financing is uncommon for several reasons. There is a natural reluctance for sellers to get in the business of lending money, considering it too risky or dangerous. Secondly many sellers need the money from the sale to buy another home. A third reason could be a general unfamiliarity with this option. Many sellers are not aware they can sell the loan immediately to get the funds they may need quickly.
What are some of the advantages for buying using this type of financing?
-Closing can be faster. Much of the waiting with loan officers, underwriting and the general bureaucracy of closing is eliminated
-Closing cost may be lower. Items such as bank fees and appraisal cost are not a factor.
-There is more leeway with the down payment. The down payment is strictly between the seller and buyer and does not have to meet bank or government mandated minimums. It doesn’t guarantee you get a lower down payment however, it is possible.
Keep in mind there are also disadvantages.
-Buyers need to do their own due diligence to make certain the seller actually owns the property or will not be in conflict with their mortgage arrangements. Some loans have a provision whereas the full amount of the loan is due if the home is sold before being paid off.
-You may have to pay a higher interest rate to make the deal appealing to the seller as opposed to other investments.
-You still need to prove your credit worthiness to the seller. If the sole reason for obtaining seller financing is because you have been rejected for a standard mortgage this may cause the seller to be skeptical of making a deal.
This is just one method of alternative financing. Other ways include lease option, lease purchase and equity sharing. The key is to do your research when planning to start or expand your real estate portfolio. You may want to check investment sites like biggerpockets.com to increase your knowledge and see what others are doing. The bank or cash are not the only options.