4 Year InvestmentSeller Financing is one of the most powerful tools you can use when selling real estate.

It may sound like a confusing (or even foreign) concept to many, but the power of this investment strategy is undeniable.

I worked for years as a real estate investor before I finally caught on to why this approach was so important. I've been using it for several years now and it has been an absolute game-changer in my business. It has allowed me to create several streams of passive income that require virtually no work from me on an ongoing basis.

One of the greatest things about seller financing is that it can provide you with passive income – money that comes in regardless of whether you continue to work. In a sense, seller financed properties are similar to rental properties, but without all the headaches that rental properties are known for. I LOVE financing the sale of my properties because in most cases, I am getting 100% of my initial investment back almost immediately (usually at the closing, or within the first few months of the loan closing). This means that almost all of the payments I receive for the next 5 – 10 years are pure profit.

That's right…   just think about that for a second.

Becoming The Bank

Seller Financing is essentially the same thing as “lending money” to the person who is buying your property. In essence, you are becoming the bank when you finance the sale of real estate in this way.

According to Dictionary.com, the word “lend” is defined as follows:

“To grant the use of (something) on condition that it or its equivalent will be returned.”

Note that the word “cash” or “money” wasn't mentioned anywhere in that definition.

When you finance the sale of a property that you own, you aren't advancing any actual dollars to the borrower. Instead, you are simply granting the permanent use of your property and accepting payments for it in the form of cash over the course of several months or years in the future. These payments typically include principal, interest and ongoing servicing fees for the life of the loan (and keep in mind, you can also collect a reasonable amount of closing fees on the front end as well).

This kind of seller financing can go by several different names. Some call it “Land Contract”, “Contract for Deed”, “Note with a Deed of Trust”, “Mortgage” and even a “Lease Purchase” can be interpreted as a form of seller financing (depending on how the deal is structured).

Seller financing is an amazing tool because it allows you to do any/all of the following things with your real estate:

  • Sell your property at a significantly higher price.
  • Make a noteworthy extra additional income from interest, servicing fees and closing fees.
  • Wash your hands of the property’s ongoing maintenance issues by putting these problems in your borrower’s lap (after all – they are the new owners of the property).
  • Add significant stability and peace of mind to your business operation with a dependable, monthly income.
  • Charge prepayment penalties if/when the borrower chooses to pay off early.
  • Repossess and resell the property if the borrower ever defaults on their loan.

Why Isn't Everyone Doing This?

When I first heard about Seller Financing, I was a little hesitant to start moving my inventory this way. The whole idea seemed complicated, confusing, and even scary. My mind was filled with uncertainty and skepticism. I kept telling myself things like:

  • Let's just keep this simple! Why over-complicate this whole “property selling” thing?
  • I don't understand all the math, banker terminology and finance lingo (What the heck is an Amortization Schedule??)
  • I'm not a bank! How am I supposed to keep up with servicing a loan, invoicing payments, handling missed payments and so on?
  • Why would I want my properties to be “stuck in limbo” for years on end as I slowly get paid off. Wouldn't I be better  off getting a lump sum of cash?
  • What if one of my borrowers stops paying me? How am I supposed to re-possess a property?

If you're anything like I was, you may be dealing with some of these same knee-jerk reactions as you think about selling properties this way.

Let me just reiterate that Seller Financing is one of the most important things I've discovered in this business. While it isn't always appropriate for every deal, it can be an extremely powerful generator of extra income when the situation is right.

When Is Seller Financing Appropriate?

Here are some of the criteria I use to determine when Seller Financing makes sense in a particular scenario:

  • When I have a strong equity position in a property (e.g. – I own it free and clear)
  • When I can sell a property for FAR more than I paid for it (this can work great with quick flips)
  • When I'm stuck in a Buyer's Market (i.e. – real estate is moving very slowly and buyers are difficult to find)
  • When banks aren't willing to lend on the type of property I'm trying to sell (this happens quite often with vacant land)
  • When banks won't lend to anyone due to market conditions in general (this was a common issue in 2008 – 2011)
  • When my buyer who has a strong down payment, they're willing to pay my full asking price, but for whatever reason – they don't fit the exact profile that their banker wants to see

Now don't get me wrong…   I don't need ALL of these conditions to be in place – but usually when I see two or more of them, I'll know I've got a ripe Seller Financing opportunity on my hands.

Opening The Doors Of Opportunity

When you list your property for sale and offer seller financing as part of the deal – you'll find that a lot more buyers will start reaching out to you. MANY more than if you were only willing to accept the full sale price in cash (like the vast majority of sellers).

Why does this happen? It’s simple. By offering seller financing, you are making this property significantly more attainable for the buyers in your market. Seller financing will open the doors of opportunity to a lot of people who otherwise wouldn't be able to purchase your property at all.

This doesn't necessarily mean that your buyers won't be credit-worthy.

To start this discussion, it’s important to understand how banks work.

Most lenders are in the business of offering financing to a large demographic of people for a variety of different purposes (one of which happens to be real estate). Very few bankers have the ability to approve loans on their own authority. Instead, they have to evaluate every borrower using some pre-determined criteria (and given a bank’s situation – with hundreds of loans on their books for all sorts of different purposes – who can blame them?).

All banks have to look at the5 C’s of Credit”:

  1. Capacity to Repay (Does the borrower have the resources to repay the loan?)
  2. Capital Invested (How much “skin” does the borrower have in the game?)
  3. Collateral Availability (Will the bank be able to cover themselves if the borrower stops paying?)
  4. Conditions (What is the intended purpose of the loan?)
  5. Character (How does the lender perceive the borrower? Is the borrower a good person? Can they be trusted?)

Many, many times – prospective borrowers aren't able to qualify for loans simply because they don’t fit into one or more of these five boxes.

In addition to the “5 C’s of Credit”, banks look at a lot of other things when they’re considering whether or not to lend money to a prospective borrower. They generally want to see:

  • A solid credit score (most lenders consider the 700+ range to be “good”). You can check your credit score for free to see where you stand.
  • A proven level of historical income (years of employment, dollars earned per year, etc).
  • A minimum sum of cash available for a down payment (usually 20% or more).
  • The property itself should meet a certain criteria (size, condition, built to code, etc).
  • The property usually needs to be situated in the right geographic location.
  • The property value needs to be supported by a current appraisal.
  • The property’s chain of title must be flawless.
  • The list goes on, and on, and on…

The real kicker is – I've seen a lot of would-be deals get completely blown out of the water, all because the loan applicant was missing one little item on the banker’s check list of qualifying criteria. Everyone goes home sad and it’s a shame.

Measuring tools like the “5 C’s of Creditdo matter. The fact is – some people should be disqualified. For instance, if somebody has no income and is a convicted felon, that probably represents an issue with their character and their capacity to repay (and these are both extreme examples, by the way). On the other hand, if somebody has one “blip” on their credit report – a lot of banks aren't able to think critically and see past this.

HopeIt's unfortunate for the loan applicant, but the advantage that YOU have as the lender, is that even when a person doesn't fit into all of these boxes, they still may be a viable candidate for a loan! You have the ability to think critically and consider ALL the factors with your buyer.

Lenders can be extremely risk-averse in today’s economic climate and as a general rule of thumb; they aren't going to lend money to a borrower unless there is virtually zero risk in the deal.

I've seen a lot of inflexibility from banks in recent years, and this ultimately tells me that many of my buyers will never be able to buy my properties UNLESS I am willing the finance the sale for them.

Related Topics:

Why Seller Financing Makes Sense

How to Close a Land Contract In-House

How to Close a Deed of Trust In-House

Land Contract or Deed of Trust? Which is Better for Seller Financing?

Join the discussion 24 Comments

  • John says:

    I like seller financing, I am doing one now, I like to know how you find the cheap houses to sell, is it a part of your motivated seller campaign.

    • Seth Williams says:

      Hi John, most of my process is described in a 3 part blog post (starting here). There are other tactics I use as well… but if you’re just looking for a place to get started – that’s probably the best initial suggestions I can give you.

      Good luck!

  • Ben Johnson says:

    Hey Seth,
    I really enjoy the stuff that you put out there about land investing. I am a big believer in land as I’ve been making a living buying and selling it for most of the last 15 years. I also love learning about new strategies and I have a couple of questions about the tax delinquent postcards….. Can the county give you just the land tract delinquencies or do they also lump houses in with the land? Will I need to sift through and eliminate the houses once I get my list? Also, would you be willing to provide a prototype of the tax delinquent postcards that you send out? (If you can’t, I completely understand. You can’t give away all your secrets :-). Thanks for your help and I really appreciate you sharing your insights.

    • Seth Williams says:

      Hi Ben! I think the answer to this question depends largely on the county. In my experience, only a small handful of them can separate the land from the houses (and I’m guessing a lot of them actually can, but they just don’t know how to do it – so they’ll tell you “no”). The truth is though – when you’re talking about a delinquent tax list, you’ll find the the vast majority of these properties do end up being land and/or properties that are owned free and clear (because if a mortgage was involved, the mortgage company would require an escrow account to pay the property taxes, which would have kept them off the list in the first place).

      Regarding those postcard templates, you can find them right here in this blog post.

      Hope that helps!

  • Joel says:

    Hi thank you for the great information. Me and my wife are buying land almost everywhere we see a space.
    I have one question: if I I’m seller financing a person and he builds something on it but later fails to continue with it should I put up a clause that says anything he builds there belongs to me because the land would still be mine?
    Thank you for the advise.

    • Seth Williams says:

      Hi Joel, that sounds pretty fair to me… in fact, that kind of language is already baked into the template I use (as it is in most of the standard templates I’ve seen). I think that’s a pretty standard expectation in most “contract for deed” scenarios.

  • Lita says:

    Hi Seth,
    This may be exactly what we should do and thank you for the article. How do you find out what the amount for the lease should be? We have commercial property, are not near it and have no idea. How does one go about finding the people to lease to? Thank you.

    • Seth Williams says:

      Hi Lita, you might consider enlisting the help of a local real estate agent – even if you don’t end up using them, these folks can usually at least point you in the right direction.

      Good luck!

      • Lita says:

        As it turns out she knows nothing about this and I guess now we have to pay for a lawyer in Florida to make sure we have the right contract. And I DO NOT trust lawyers! So thinking this is not for us.

        • Seth Williams says:

          You could also try contacting a local title company – they can’t necessarily give you legal advice, but if it’s just a question of which forms and documentation to use, they should be able to at least point you in the right direction (if not handle the whole process for you).

  • Raven says:

    Isn’t this an issue with the Safe and Secure Enforcement Act and Mortgage Licensing Law from Bush. Pretty sure you have to be a loan officer no?

    • Seth Williams says:

      Hi Raven – it is for some properties, but not all. I work entirely with vacant land properties when I use seller financing, and the SAFE Act generally doesn’t apply to that property type. You can find out more about it in this blog post.

  • Telesha Chaneyfield says:

    Hi do I need to be licensed to buy and sale vacant land.? My Husband and I are looking into this business we aren’t sure if we need any schooling or state certificate to buy and sale vacant land only no real estate. Thanks

    • Seth Williams says:

      Hi Telesha – if you’re simply buying and selling the land on behalf of yourself, then no – you wouldn’t need a license. If however, you’re buying and selling on behalf of someone else, then you may need one.

  • Ali says:

    Hi Seth – if a person purchases the land via seller financing and builds a home using a mortgage, what would happen if they defaulted on their mortgage loan payments? I assume the lender forecloses on the owner’s interest in the land and then sells the property to recover as much of the loan as possible. So where would we stand as the land seller?

    • Seth Williams says:

      Hi Ali – usually the mortgage lender (for the construction of the building) would require that the seller financed note be paid off BEFORE they’ll lend any money (to ensure that they have a first lien position on the property), so the borrower probably have to include the payoff of the seller financed debt with the new financing package.

  • Owner Finance OKC says:

    This post is very informative. I gained a lot of knowledge from it.

  • Sooner House Buyers says:

    Thanks for your informative blog.

  • Steve says:

    HI Seth, thanks for the informative content! My friend is offering to me option to sell to sell over two years. The land is priced above the comp for the similarly zoned lands around it, but he’s very bullish on this market as he holds the largest commercial parcel in this town. I do trust him, but I want to do my own due diligence. What should I be looking for?

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