by Tracy Z Rewey
You’ve probably heard the call to “Be the Bank” or use “OPM” (other people’s money) for
investing. Selling or buying property with owner financing is one method of using creative
Over the years it’s been done well, tragically wrong, and somewhere in between. In this
series we will cover:
Market Size of Seller-Carry Creative Financing
Why Use Seller Financing?
A Seller Financing Example
Building Your Owner Finance (OF) Team
Using MLOs For Dodd-Frank Compliance
Optimizing Mortgage Note Terms for Resale
10 Steps to Creating Notes
What Is The Market Size Of Seller-Carry Creative Financing?
In the past five years, over $113 billion in owner financed notes have been originated with
creative financing. This includes residential, commercial property, and land where the owner of
the property took back a 1st position loan greater than $30,000. That number goes up when
second liens are included.
This form of private financing is used all across the nation with Texas, Florida, California,
Arizona, and North Carolina being the top users in 2019. A decade of tracking these seller
financing stats shows the need for private mortgages goes up when traditional bank financing is
harder to obtain and then level out in a balanced market.
Think seller financing is all about ugly houses, low price-band homes, and zero down
It might surprise you to know the average balance comes in at $196,926 on residential properties
and the average loan to value (LTV) was 80%.
Why Use Seller Financing?
After three decades of working with private financing, the reason sellers offer financing
usually fits into one of these buckets:
· The Buyer Has Issues
· The Property Has Issues
· It’s A Well-Planned Investment Strategy
Why Buyers Seller Finance
It is easy to see the advantages for buyers purchasing with creative seller financing. They
get to deal with the seller and avoid working with a bank. That means:
· No costly loan fees
· No private mortgage insurance premiums, and
· Less restrictive underwriting in the areas of:
1. Down payment
2. Credit scores
3. Proof of income
4. Self-employed income
Overall, seller financing is easier, faster, and less restrictive than traditional bank loans.
While they might pay more in interest they usually save on upfront costs. Once a buyer
establishes a good payment history and improves their credit scores, they can often refinance at a
Why Sellers Offer “Owner Will Finance”
The average seller of property wants full asking price, a cash buyer, and no costs. So why
would they consider owner financing, especially when notes are typically sold at a discount?
There can be advantages for the seller to consider offering a property for sale with
financing when there are property challenges:
· Property type is difficult to finance through traditional third-party lenders
· Property has been on the market for 90 or more days
· “As-is” closing is desired on a property in need of repairs
· Ownership has not met minimum holding time or title seasoning requirements of traditional
· Immediate closing required in the event of foreclosure or other financial burden
· Quick closing is preferred by seller to free up investment capital
Other sellers look at owner financing as part of their real estate investment strategy to:
· Convert rental income to interest income
· Maximize selling price
· Increase prospective buyer pool
· Utilize the installment sale tax advantages for deferral of capital gains under IRS Section 453
covered in Publication 537
· Leverage property when buying or selling (including wrap notes subject to underlying
· Generate long-term interest income
The last one is a personal favorite. If you have a $100,000 mortgage at 9.5% interest
amortized over 30 years, the monthly payment would be $840.85. If the buyers took the full 30
years to pay back the loan, they will have paid $302,706 over time. That’s an additional
$202,706 due to interest! After all, why should the banks get all the benefits of interest income
backed by real estate?
A Seller Financing Example
A seller financing transaction typically involves a deed from the seller to to the buyer and
then the buyer signs a promissory note and mortgage back to the seller (instead of a bank).
In some states a deed of trust, trust deed, or security deed ise used instead of a mortgage.
In other states a land contract or contract for deed is used. Other standard closing documents and
disclosures would also apply.
Here’s a look at a seller financing example using a first and a second lien:
Sale Price: $100,000
Down Payment: $10,000
Seller Financed 1st: $80,000
Rate/Term/Payment: 9.75% for 240 months @ $758.81/month
Seller Financed 2nd: $10,000
Rate/Term/Payment: 9.75% for 120 months @ $130.77
Total Payment Principal/Interest (1st & 2nd): $889.58 (plus 1/12 taxes & insurance)
Building Your Owner Finance Team
If you plan to owner finance, you want to start by identifying important members that can
be part of your OF team:
· Real Estate Attorney/Escrow Closing Agent – Legal counsel can prepare documents and
handle the closing.
· Title Company – Don’t overlook title reports and insurance when using owner financing
· Real Estate Agent – Property can be handled for sale by owner (FSBO) or with a real estate
agent. The majority seller finance deals we see still involve a realtor.
· Accountant/CPA – Tax pros will help calculate the tax implication and tax deferral under
installment sale method.
· Mortgage Loan Originator (MLO) – When selling to an owner-occupied buyer an MLO
can help qualify the buyer and be sure they can afford the payments.
· Servicing Agent – Use a third party to collect payments, keep track of taxes and fire/hazard
insurance, make collection calls, and handle the annual interest statements.
· Self-Directed Retirement Plan Custodian (a.k.a. SD IRA) – Real estate and real estate
notes can be bought and sold out of a retirement account providing profits tax-deferred or
When working with seller financed transactions, remember, these are licensed services, so
work with qualified professionals:
· Legal Advice
· Financial Advice
· Investment Advice
· Loan Origination Services
· Real Estate Broker
· Securities for Sale
To be continued.
Confidently Create Real Estate Notes!
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resale? Want to confidently create, evaluate and own real estate notes?
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in-depth coverage of all 10 steps along with advanced strategies for using wraps, partials, and
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Tracy Z Rewey has been buying and selling real estate notes since 1988. She is the author
of “How To Calculate Cash Flows” and the “Creating Notes Master Class.” Her passion is helping
you confidently create notes with owner financing.
Contact her at Diversified Investment Services Inc.