A little while ago, we did a video about the difference between investing in a qualified retirement plan like a 401K, versus investing in residential real estate. Today, we’re following up on that, and talking about a lending option that’s available for real estate investors - which is seller financing.
How to Understand Seller Financing
Seller financing is one of the best lending deals you can find. The seller is actually taking on the role of the bank. You would go to the title company, and the seller would put you on the title of that property. You’re receiving the property, and in return you’re signing an all-inclusive trust deed and note. That note portion is a promissory note. It includes an agreed upon sales price, interest rate, and amortization schedule. You’ll know when your monthly payments are due, and how much they will be. You agree contractually to make these payments on a monthly basis.
There will be a balloon payment in three, five, seven, or maybe 15 years, where the full amount is due. The sellers sign the property over to you at the same time they’re signing the promissory note. If you default, they have the right to act as if they were the bank, and they can foreclose and take it back from you. It’s like any other foreclosure; it will ruin your credit and remove the asset from your possession. It’s not something you want to happen.
Paying the Balloon Balance
You agree to the price, payments, insurance, etc. You also agree to the period of time when that balloon payment is due, and you have to pay off the balance. We know property mortgages often have 20 or 30 year amortization schedules. These seller-financed loans are a little quicker. The idea is that at the exact point when your balloon payment is due, you do a rate in term refinance. This refinance allows you to take equity out of the home. You’ll get that equity by putting money into the home or paying down the loan balance or increasing the value. You’ll refinance the loan and pay off the seller, who was carrying the note.
This is just scratching the surface. It’s easy to do, and a great way to go.
We are not licensed mortgage officers, but we know the right people in the industry who can help us accomplish this. If you have any questions about this type of lending structure, please contact us at Utah Property Solutions. We’d be happy to tell you more.