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How to Use Seller Financing to Your Advantage

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Typically, fewer than 10 percent of the homes on the San Diego real estate market offer some type of seller financing. When a seller assumes the position of financier, he or she extends credit to the buyer, creating a loan installment agreement, usually with interest. Many seller financing agreements are short-term loans with a balloon payment after a few years – which can give both buyers and sellers a little more creativity for financing in a very tough market. Buyers and sellers can structure the loan in multiple ways, creating financing with very competitive interest rates and payment terms that may just sweeten the sale, making the property more attractive to buyers.

In general, seller financing only works when the seller owns the property outright – or when the buyer can make a down payment large enough to cover the seller’s remaining mortgage – because in most cases, lien holders have a difficult time coming to terms with their debtor financing a property for another buyer, which generates additional risk for the original mortgage lender.

Seller financing comes in an array of arrangements. For example, a seller may be willing to offer financing as a junior mortgage when the buyer can’t afford a down payment and the mortgage holder is unwilling to finance more than 80 percent of a home’s value. Other arrangements include assumable mortgages, land contracts, and lease options.

It’s no doubt that about 90 percent of the deals that exist today are either foreclosures or short sales, but the other 10 percent can earn you money with a little creativity. Here are some examples of how I have used creative seller financing.

Example 1: Downtown San Diego Rehab

Recently, I came across a listing on MLS for a San Diego property that seemed to be for a fair price, but it looked like it needed a lot of work. It had been sitting on the market for over three months, and I was quite certain the seller must be getting eager for a sale at this point. I talked with the San Diego real estate agent for the seller and learned the seller had obtained this property at a downtown San Diego real estate auction about six months ago. Since most buyers are unable to see the interior of the property they buy at auction prior to the sale, the buyer had no idea about just how much work the property needed: it had multiple problems including foundation, electrical, and plumbing issues. When the investor purchased the property, he had no idea how expensive the repairs would be, so he listed it for sale hoping another buyer would come in and clean up his mess. His original purchase price was a little over $230,000. The investor purchased the property for cash, so he didn’t owe anything on it. I knew this gave him a little more flexibility when it came to financing or working out a deal.

I sent my contractor to the property, and we determined repairs would cost about $75,000, and after that, the property would be worth around $275,000. Clearly, there was no way to make a profit on this property if I paid the asking price and completed all of the repairs. I talked to the owner and told him that instead of selling the property to an investor for pennies on the dollar, I would join him in a joint venture. I told the seller to finance the property to me at $130,000, and I would come up with the $75,000 to do the necessary work. After the property sold, I would split the profits with him 50/50. Since I only have $75,000 invested, my return on capital is amazing, even with sharing 50 percent with the seller. While the deal will still result in a loss for the seller, he is better off than if he’d held a fire sale with another investor.

Example #2: Working with People that Have Lived in their Homes for Years

Here’s another way you can work this strategy. Many older couples that have lived in their homes for decades may want to sell their property, but don’t want the hassle or lack the skill set to fix up their homes. Many of these families have lived in their homes for over 50 years, necessitating many upgrades to make it marketable. In this case, seller financing works out very well for both parties, since the homeowners want to get top dollar and you’re in a position to help them. Since you are only financing the rehabilitation, your return on investment is amazing, and the homeowner can get top dollar for their paid-off home when they finally do sell.