Epic Real Estate Investing - How Does Seller Financing Works in A Home Sale | 1196

Episode Date: April 21, 2022

Seller financing is an option to consider if you cannot qualify for loans from banks. This can be a good deal and an excellent way to buy a property, but how does it work? In today’s show, Matt reveals how does seller financing works in a home sale. Tune in and find out! Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. How does seller financing work in a home sale? I mean, you've heard about seller financing. Sounds like a good deal, but how does it work? Well, I'm about to show you right now. You ready? Let's go. Welcome to the all-new, epic real estate investing show. The longest running real estate investing podcast on the interwebs,

your source for housing market updates, creative investing strategies, and everything else you need to retire early. Some audio may be pulled from our weekly videos and may require visual support. To get the full premium experience, check out Epic Real Estate's YouTube channel, EpicR-E-I.TV. If you want to make money in real estate, sit tight and stay tuned. If you want to go far, share this with a friend. If you want to go fast, go to rei-Ase.com. Here's Matt.

You're in the market for a new home or that next investment property, but you're having trouble qualifying for that loan with your bank, seller financing is an alternative that can keep your acquisition in play. Keep in mind, however, that not all sellers will be willing or able to provide direct financing to you, but it can be an excellent way to buy a property while also simplifying the closing process. That said, seller finance homes can be complex and will necessitate a written agreement, just like all real estate transactions. So it's important to understand the process before signing on the dotted line.

So I'm going to walk you through how seller financing works, how it can help you as a buyer or a seller, and how to structure a seller finance deal. And by the way, if you're still looking to get that first deal under your belt, I put together a free training just for you to help you get that first deal done. And then how to earn $5,000 a month flipping contracts and flipping properties working as little as one hour a day. And you can access it at matsfreetraining.com. All right. Let's start with what seller financing is so that we start on the same page. Seller financing, also known as owner financing,

lets buyers pay for a property without relying on a traditional mortgage. Instead, the property owner or seller finances the purchase, often, but not always, at an interest rate higher than the current mortgage rates and with a balloon payment due after at least five years. And that's typical. But when you're dealing directly with a seller for financing, anything goes and you get what you negotiate. So don't be afraid to ask for what you want when it comes to the terms of the financing.

Overall, seller financing can simplify the process of buying and selling a property by eliminating the need for a lender, an appraisal, and or even an inspection. Although, I recommend you always get a physical inspection done before you sign your final documents. To really make this simple, think of seller financing as buying a property from the seller with an I-O-U. I'll give you some money now, and then I owe you the rest later. That's what seller financing is. Now, how it works. Well, you have options.

There are various seller financing structures that can affect the buyers and sellers' security in the property and the seller's process for regaining title if the buyer defaults. And I'll run down the three most common ones. Number one, the promissory note and mortgage or deed of trust. A promissory note and mortgage or deed of trust depending on the state is the most common form of seller financing. This is the same structure a bank would use and is what people think of when they think mortgage.

The note outlines the amount the buyer borrowed and the terms of repayment to the seller. The mortgage is a separate document that securitizes the seller with the property in the event of a default. The buyer is put on title with the deed and the mortgage is typically recorded in public records. The promissory note typically isn't recorded and the original should be held by the seller. A note and mortgage is the most secure form of financing for the buyer and the seller. Now, number two, contract for deed. A contract for deed can also be called an agreement for deed. or land contract installment, depending on the state the transaction has done it.

It's structured like a note and mortgage, but instead of the buyer receiving a deed and being placed on title, the seller remains on title until the debt is repaid and full. Very much like when you buy a car. You know, you sign the paperwork, you hand over your down payment, and then you drive the car off the lot. You have full use and rights to the car, but you're not officially on title of the car until you make your final payment. That's when you receive your pink slip in the mail.

Using a contract for deed to buy a house, it's just like that. Some sellers may choose this structure because it's less time-consuming and more cost-effective to regain marketable title of the property if the borrower stops paying. In other words, it's easier for the seller to take the property back if the borrower defaults. Many states allow eviction or forfeiture which are faster and cheaper than a full foreclosure. The procedures for this vary from state to state, and contracts for deed aren't recognized in some states. So it might not even be an option for you depending on where you're buying. A contract for deed is a less secure form of financing for both the buyer and the seller.

Since the seller remains on the title, while the buyer lives in and is responsible for the property, any liens or violations that become attached to the property during that period could negatively affect the seller. Number three, lease option. A lease option is a form of owner financing where the buyer agrees to lease the home with the option to buy it at the end of the lease agreement term. The buyer and the seller agree on the purchase price of the home before the lease starts, and the seller typically receives a down payment, or commonly referred to under this structure, as a non-refundable option fee.

At the end of the lease term, the buyer can buy the home or forfeit their lease option. If the buyer decides to buy the home, payments made during the lease period can be used toward that purchase price. But not always. It depends on what the buyer and the seller agreed on. It depends on what you, the buyer, negotiated. You'll often see this structure promoted to buyers in the marketplace as rent to own.

That's what a lease option is most of the time. Now, there's some very important information you need to know according to the Dodd-Frank Act on whether you'd be able to even purchase or sell a property using seller financing. Okay, now, what you need to know about seller financing documents and the Dodd-Frank Act. The documents used in owner financing vary depending on the type of structure used, but in most cases, there are two separate documents. the note which outlines how much is to be repaid in the terms of the repayment, and the security instrument, which could be the land contract, the mortgage, or a deed of trust.

The Dodd-Frank Act was written and passed to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end too big-to-fail companies, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes, it was put in place to protect the consumer. But like most government legislation, that means it also added some challenges to get the job done. The Dodd-Frank Act made several changes to the mortgage industry, specifically around seller-financed residential loans. While much of the bill focuses on debt collection and servicing rights, there were also revisions to who can originate seller-financed loans. You see, before 2014,

the person holding the financing could create the note and mortgage themselves or have an attorney or a title company do it for them. And they still can't, but with limits. The Dodd-Frank Act requires a licensed mortgage loan originator, or an LMLO, to underwrite and create any loans in which the buyer intends to reside in the property. So it's now common practice for the seller to hire a third-party LMLO to handle all of the required loan underwriting, including pulling credit, determining the debt-to-income ratio, verifying identity and income, and creating and executing all of the paperwork. So if you intend to write or create the loan yourself, you need a license unless you qualify for one of these two exceptions. One, you own the property you're holding

financing for and only create a loan for one property that you didn't construct or act as the contractor for in a 12-month period. Or two, you're a trust, estate, or entity holding financing for three or fewer properties that you own in a 12-month period and didn't construct or act as the contractor for. Further, there are guidelines on specific terms such as balloon payments, interest rates, and the vetting process. For this reason, even if you're not required to be a licensed mortgage loan originator, you should work with a knowledgeable professional who can help you with the paperwork and underwriting to make sure all that stuff gets done correctly. It is important to note, however, that the Dodd-Frank Act does not apply to, and you'll probably

like this part, properties intended for investment purposes, such as rentals, vacant land, commercial properties, or non-consumer buyers, such as limited liability companies, LLCs, or corporations, or trusts, or limited partnerships. In other words, real estate investors, you, me, we were exempt. If you'd like to learn more about buying properties with seller financing and other creative financing strategies, I've got a series of free lessons that break down a number of different strategies in great detail. You can get them all for free at creative financing.us. And that wraps up the epic show.

If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. And when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here and I'll take great care of them. God loves you and so do I. Health, peace, blessings, and success to you.

I'm Matt Terrio. Living the dream. Yeah, yeah, we got the cash flow. Okay, only 10 more presents to wrap. You're almost at the finish line. But first? There, the last one. Enjoy a Coca-Cola for a pause that refreshes.

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