I have bought many properties using seller financing (owner financing), where my seller financed the sale to me . You can get very creative with this as long as both parties agree and it is written in the acceptance contract. Some examples would be:
-No payments or interest for 60 days. (or 90 or 120, or whatever you can negotiate)
-2nd mortgage positions instead of the standard first position (subordination technique)
-Substitution of collateral clauses (more on this later)
-0% financing (or 1.25 or whatever you can negotiate)
-No payments no interest for 5 years
-Various balloon periods
-Value adds such as furniture, vehicles, etc etc
-Purchasing a package of property , selling off 1 or 2 of them at closing, and asking the seller to release them from the note (and pocketing the cash)
-Etc etc lots of other cool techniques
I have a 3 part series where I will share my favorite financing strategies to buy with . Again, this is where we BUY. I use other structuring when I sell.
For this introduction post, lets summarize first what the terms mean, and ways to buy with owner financing in general.
– Seller carry back, with note and mortgage. This is exactly how we buy typically when using a bank. The bank gets a mortgage and note (in AR) and we get the deed upfront when we buy. The note has all the terms and guarantees the repayment, and the mortgage is the document that is used as a security instrument to attach the real property to the note as collateral… hence protecting the lender on the note. A lot of people get confused and just simply call this a mortgage… but do not understand that there are 2 documents . A foreclosure process must be completed in order for the seller/lender to re-obtain the collateral.
–Contact for deed – AKA Contract for sale, land contract, installment sale, or simply just a purchase contract . This is where financing terms are written out on a contract, including purchase price, length of loan, interest rate, etc… but the seller holds the deed in their name until the agreement is paid in full. Only then does the deed get transferred. This can be recorded with the county just like a mortgage can, or, it doesn’t have to be recorded. It also doesn’t have to be notarized if a recording isn’t planned. This provides more protection for the seller, and sometimes can avoid the foreclosure process. Again, everything is negotiable.
–Lease purchase AKA lease-to-own or rent-to-own, Lease Option. In this category I will not be referring to the “hybrids” I see out there where some people combine lease option contracts with contract for deed contracts. I am keeping these two separate because technically they are very different strategies, and, in reality I believe that anyone who starts adding interest and loan terms within a lease option contract is really just turning it into a contract for deed (installment sale). Anyway, a lease option or lease purchase contract is simply a lease agreement where the relationship is landlord / tenant based…. but you combine it with an option agreement, giving that tenant the right to buy the property at a predetermined price and option period. I started out my career buying with this strategy, but I now very rarely ever use a lease purchase to buy with. With a lease option, there is no ownership of the property other than the equitable interest the option contract gives you.
–Subject – to financing : This strategy is when a seller has an existing loan in place, and instead of paying off that loan, you simply leave it in place and not pay it off. Then the buyer starts making payments to the loan. The deed still transfers to the buyer like a traditional sale… and the seller still has the original note owed to the lender. This is a great strategy and I have a blog post about this already that you can look up.
So those are some of the typical and common financing tools to use with buying via owner financing. I will be creating a 3-part series on my favorite ways to buy using owner financing, and each part will have a specific tool with more details about it.
I hope some of this helps you and as always
Happy Investing
-Justin