The Brutal Honest Truth About Seller Financing
I'm going to tell you what the so called "gurus" won't
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Whether you’re relatively new to real estate investing or you’re a vet in the space, I’m sure you’ve heard it before:
“Did you know that you can buy real estate without using a bank or lender—100% seller financed?”
This is true, you definitely can. And it comes with it’s fair share of perks. You skip the hassle of submitting a mountain of documents. You have more flexibility in regard to deal structuring. You eliminate most (if not all) financing fees.
But there’s also a short list of risks that can’t be ignored.
Without a firm grasp of these 3 critical aspects of seller financing, you’re bound to run into trouble.
1. Seller Financing ≠ No Debt Service
Just because you close a deal without a bank or mortgage broker, does not mean that there’s no debt involved. The seller is simply stepping into the lender role.
More often than not, you’re still going to put up a downpayment. The difference between your downpayment and the purchase price is what the seller will be lending aka “carrying”.
The terms that you and the seller agree to (interest rate, amortization, and payback period) will determine the debt service.
If you’re not careful, you can end up paying more to the seller, than you would to the bank or a traditional lender.
2. Limited “Tradability”
There are plenty exceptions, but usually sellers are only willing to finance deals that no one else is willing to buy. If they could put it on the market today, and have it sold by tomorrow, they would.
Whether it’s the condition of the property, asking price, or market timing, there’s typically something that’s keeping buyers away from putting forth a strong offer.
And while this may not be a deterrent if you’re a long-term buy-and-hold investor, it’s something that can hinder your ability to exit if you ever end up deciding to sell.
3. Less Liquidity
Lastly, are the liquidity obstacles. If a property is tough to sell, it’s probably equally tough to finance. If buyers don’t want it, lenders and banks will often stay away as well.
Now you may be saying to yourself: “This is why I’m using seller financing!”
I hear you loud and clear, but you can’t stay in bed with the seller forever. At some point they’re going to want the rest of their money, and not many sellers are going to carry a loan for 30 years.
So when your payback period comes to an end, you’ll either need to dig deep into your pockets to come up with the rest of the purchase price, or search far and wide for a bank or lender that’s willing to take the seller’s place.
Both routes can be equally daunting.
I don’t share these aspects of seller-financed deals to scare you away from opportunities that may be out there.
The hairiest deals often have the most upside. However, it’s equally important to recognize the potential downsides as well.
Not enough brokers, investors, and advisors are sharing the risks that come along with creative financing. I had to be the one to do it.
If you’re considering taking down a deal using seller financing, and you’d like feedback on the terms and structure that you should go with, send me a message or leave a comment.
I may be able to help you avoid stepping into a sticky situation.
What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?
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