Using Seller Financing as an Alternative Investment Strategy

Using Seller Financing as an Alternative Investment Strategy

Why it is smart to start investing in the stock market?

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Should I be a trader to invest in the stock market?

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What app should I use to invest in the stock market?

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Is it risky to invest in the stock market? If so, how much?

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Tell us if you are already investing in the stock market

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Funding investment real estate is very different to buying your home. Yes, you can approach the bank, who may (or may not) grant you further borrowing. But today’s entrepreneurial landscape has many other ways to skin a cat, one of which is seller financing.  

You might also hear it referred to as owner financing. Whatever term is used, what it means is that the funds are borrowed from the collateral of the person selling the property, as opposed to a bank or any lender. 

The Pros and Cons of Seller Financing for Real Estate Investing

This increasingly popular method of creative financing for real estate investments is actually pretty simple. 

Rather than borrowing from a financial institution, the owner draws up an agreement whereby they extend you a line of credit. You then make monthly payments directly back to them. The deal will probably include a down payment and/or a balloon, end-of-agreement amount. The terms will be particular to what you and the vendor negotiate and are legally binding. 

Such an deal can potentially be a win-win situation for both the vendor and the buyer, with advantages that include:

  • Bypassing the banks: And with it the many hoops to jump through to get a loan or mortgage. Buyers with less-than-perfect credit ratings or who’ve already borrowed the max that banks typically lend can find it an easier method of borrowing.
  • Loan lengths can be tailored to requirements: Depending on what’s agreed, they might be as short as a few years or over a longer period. Typically, amortization timescales are shorter than regular mortgages.
  • The cost of borrowing can be lower: And for closing costs in particular.
  • The seller gets a higher interest rate: Buyers should expect to pay a few percentage points above that of a regular bank rate. As with all non-traditional lending, the greater associated risk is reflected in a typically higher interest rate.
  • Funds are available quickly: An agreement could potentially be agreed in days, rather than the protracted (painful!) process that banks require. 
  • The seller can take advantage of tax benefits: A well thought out agreement might mean a lower tax bill, thanks to money coming in over months and years, rather than in a lump sum.

Of course, there’s always a flip side. Some of the downsides to a seller financing their real estate are:

  • It can’t be done for a mortgaged property: The vendor needs to own the property outright to offer this option.
  • Buyers may need a larger upfront payment: This is typically true, along with the already-mentioned higher interest rates, and shorter loan term.
  • The vendor takes on the risk: This means a shortage of people prepared to enter into a seller financed real estate deal. They will have to oversee and collect the monthly payments themselves. However, should the buyer (you!) default on the loan then the vendor is legally entitled to foreclose and reclaim the property, exactly as a bank would.
  • Sellers don’t need to carry out improvements: For less than pristine properties (AKA, doer uppers) the vendor won’t have to spend what can be a substantial amount to make the home traditionally “buyer ready”.

Making the Most of Creative Financing for Real Estate

Finding a seller willing to enter into a finance deal is the biggest hurdle. Some common strategies include driving around your chosen area, spotting a distressed property, and making direct contact. This is known as “driving for dollars” and, although time consuming, it can be a lucrative method of finding your next BRRRR or fix and flipper.

Other people use the direct mail approach (old school, but it still works). Networking, social media advertising, and even cold calling, if you have the temperament for it, are also proven methods. In short, when it comes to canny investor strategies for finding seller financing homeowners, it pays to cast your net wide…

Other tips, once you’ve found a seller open to your suggestion, include:

  • Market-relevant negotiation: The better you know the local real estate landscape, the easier it will be to negotiate a deal that best represents the current conditions.
  • Be flexible: For example, will the seller offer a more favorable interest rate in return for a bigger down payment?  Would their tax affairs get a boost from regular monthly payments as opposed to a lump sum of a traditional sale? Aim for a mutually beneficial agreement that can mean both parties end up better off.
  • Ensure due diligence, legal compliance, and clear terms: This prevents any misunderstandings, compliance with local real estate laws, and everyone knows exactly where they stand.

Of course, seller financing for real estate investment purposes is only one of many potential creative methods of extending your property portfolio. Others include syndicates, crowdfunding, HELOCs, and hard money loans. 

For the latter, no-one offers better deals than BRRRR Loans, with a wide range of funding options for fix and flip, buy-to-rent, and our namesake – funding for Buy, Rehab, Rent, Refinance, Repeat properties.

Find out more at https://www.brrrr.com/