How to Supercharge Your Rental Portfolio with Seller Financing

General Real Estate Investing
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How to Supercharge Your Rental Portfolio with Seller Financing

Jorie Aulston
Aulston Group/JOG Investments

Wholesaling is all the craze today in real estate. Everywhere you look, someone is claiming to be a “wholesaler” (I hate that word, will get to that in a separate post), messaging you to JV, saying they have off market deals, oh and my favorite…emailing you, your own deals with a markup on the price. Don’t get it twisted, I use the strategy of wholesaling every single day but it’s one of many investment strategies I use to create income and build my rental portfolio.

One of the other main strategies I use is seller financing or real estate notes. Seller Financing is when a seller sells a buyer a home and finances a portion of the transaction.

For example Seller A agrees to sell me his house for $50,000. I propose for the seller to accept seller financing terms. The terms I outline are that I will put down a 10% down payment ($5,000) and the seller will finance the remaining balance of $45,000 at 7-9% interest over a 7 year term.

Lets say for this example the seller agrees to finance the $45,000 at 7%. I would have a monthly principal and interest payment of $679.17, the seller would get receive that payment monthly and that would be all profit to the seller. When you buy a house with seller financing, the buyer owns the house. The seller is just the bank, like if you were to get a mortgage from Chase or Wells Fargo. Here is a good online calculator to find out the terms of your seller financing deal.

This means the seller is not responsible for paying taxes, insurance, repairs or any maintenance. The seller is just the “note” holder and the house is the collateral.

Let’s say you want to get more creative and have a lower monthly payment and refinance or pay the house off down the road. I could propose the same terms but ask the seller to have my payments on a longer amortization schedule. Amortization Schedule is the amount of time it takes you to pay off the loan in full based off a fixed monthly payment. I could set the amortization schedule on a 10 year period and my monthly payment would be $522.49 a month instead of $679.17. In this scenario there will be what is called a balloon payment due at the end of year 7. This means that at the end of year 7, I would have to either refinance the house to pay off the remaining balance or pay the remaining balance off in full.

This is a great strategy to get lower payments up front to help a property cash flow as long as you are confident you can refinance or pay it off before the end of year 7. Seller financing is a powerful tool for a buyer and so many investors don’t know about it or don’t use it.

Another benefit is I get to stretch out my cash. I may have $25,000 in play to invest with. Instead of buying one house for cash, I could buy 3-4 houses by leveraging that $25,000 as down payments on seller financing deals. Most banks and hard money lenders won’t loan on homes priced under $50,000 so conventional or hard money financing isn’t an option. Your only option is to pay cash or get a seller to agree to seller financing terms.

There are two key documents needed to structure a seller financed deal; these are a mortgage and a note. These are the exact same documents you sign when you get a loan from a bank or mortgage company to purchase a home. These documents are signed by both parties, notarized and then recorded with the local register of deeds. This makes a record with the county that you and the seller have entered into an agreement for you to purchase the home and for the seller to finance a portion of the purchase.

This protects both parties in the transaction. The buyer can sell the home whenever they want, but the mortgage and note are recorded with the register of deeds, so that when a new title search is pulled it will show that the seller has a lien or interest in the property.

This outstanding mortgage balance would have to be paid off to the seller at close for the homeowner to sell the property. Also as the buyer you are the recorded home owner, so you get all the benefits of being a homeowner. Also there is no way for the seller/note holder to sell the property out from underneath you because the note and mortgage are recorded showing you as the owner.

When it comes to seller financing, some look at it as a risky transaction, but if you take the right steps there is no more risk than any other transaction. Just like any other real estate transaction I do, I always use a title company or attorney to pull title work and insure that the title on the property is clear.

You especially want to make sure this is done on seller financing deals and try to stay away from doing a seller financing deal on a house where the seller still owes a mortgage. This is referred to more commonly as buying a home subject to and requires more paperwork and due diligence. The main issue with buying a home with seller financing while the seller still has an outstanding mortgage, is the obvious issue of what if they don’t pay the mortgage.

If the seller would not pay the mortgage and lose the home, you the buyer would lose your down payment, any payments you have made, and the home. Also many banks have a due on sale clause in their mortgage. This means that if the seller financing documents were recorded with the county, the sellers bank could accelerate the total loan balance due by the seller at that time and if not paid foreclose on the house.

So I stay away from doing seller financing deals with sellers who still owe an outstanding mortgage on the home. But if the title work is clean and there is no outstanding mortgage, seller financing is an amazing tool for any investor.

There was a time when banks didn’t exist. If seller A wanted to sell to buyer B they would create a promissory note, it would have a form of consideration and collateral. That’s all seller financing is, two individuals agreeing to terms on a transaction. So while you are out there wholesaling, make sure you are learning the many other creative strategies to invest in real estate.

I always say “I wholesale to create income that will create residual income” And residual income comes from owning income producing real estate. Next time that seller is asking a price that doesn’t exactly fit your wholesale model, ask them if they will accept seller financing. The worst they can say is no, and you will be surprised how many actually would love to still collect residual income without the headache of being a landlord, paying taxes and dealing with tenants.

Jorie Aulston
Aulston Group/JOG Investments

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Your post is informative. However, you should not talk about ‘sub2,’ because you don’t know what you’re talking about.

[size=18pt]1) Sub2 requires MUCH less paperwork than any other type of financing, and is one of the most important reasons it’s used.

In fact, my paperwork is limited to:

  1. a one-page purchase agreement
  2. a one-page inspection sheet
  3. a one-page seller-information sheet
  4. a deed
  5. a letter from the seller giving me administrative rights to the loan.

An average loan package is forty-five pages.

Uh, no ‘sub2’ does not require any more due diligence than any other type of deal.

  1. The ‘issue’ is NOT about whether the seller pays the mortgage, or not. It’s whether YOU are paying the mortgage on time, or at all. The seller has nothing to do with the payments once title has transferred.

  2. You are confusing a “Contract For Deed” with ‘sub2.’ With a CFD, the seller retains title, and remains responsible to making the underlying payments, until the buyer performs and pays off the seller’s loans. In this case, if the seller fails to make the loan payments, then the buyer will lose any equity he has invested in the property.

In a ‘sub2’ transaction, the seller has no control over any aspect of the financing, once he’s transferred title to the new buyer. The buyer is completely responsible, as any buyer would be for the repayment of the loan …except that his credit isn’t on the line. And that’s the beauty of a ‘sub2’ deal; the buyer has virtually no liability, except to maintain the mortgage; protect the seller’s credit, and otherwise make a bunch of money off the deal.

  1. Since the buyer is investing a bunch of money into the ‘sub2’ deal, he isn’t interested in risking his investment. And that’s why it’s especially important to take title in such a way that the bank is not legally allowed to exercise its option to call the loan due, just because there’s change in ownership. Otherwise, even in a naked transfer of ownership, if the loan is current, is kept current, and the house is being maintained, lenders rarely call loans due.

I can tell you they will call loans due if they think they’re about to experience a loss. So, we don’t give banks any reason to think this.

  1. ‘Sub2’ is the only way some sellers can sell. And that’s exactly why some buyers should buy. I have yet to put 10% down on a house that I bought ‘sub2.’ In fact, I know investors who’ve been paid to buy ‘sub2,’ because the seller was upside down, and if he wasn’t willing to pay the investor to assume the liability, he would be literally stuck with the property, or be forced to give it back to the bank.

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I have made more money, faster, off houses that were ‘technically’ upside down, using ‘sub2’ financing, than I have with any other financing strategy …except for apartments. I’ve made much more on apartments.

Taking over loans is an especially fast and profitable way to own, control, flip and otherwise invest in real estate.
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Informative and I’ll make this as a piece of great advice!

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javipa :beer you nailed it. Thanks for taking the time to provide us with facts about seller financing based soley from your experience.

Cheers!