Using a seller financing agreement to sell your house can attract an unbelievably larger number of buyers in today’s market, over conventional mortgage buyers. There are so many people out there, especially with a burst in the sub-prime market, that have marginal credit, and little or NO cash. But a word of caution before we begin - make sure you are comfortable with their credit, don’t just take the first person that sends you a contract, scrutinize them as much as possible, and check their income sources, as well as their rental and employment history. With that said, let’s look at some possible scenarios to negotiating a seller financing agreement:

  • Doing a Seller Carry Back
    This is a popular option, because you as an owner are not at risk for the entire loan amount. An option I have used myself in the past to buy a seller financed property is the 80/15/5 mortgage method. In this scenario, I sent a contract to the owner, and stated that the owner would take a note back for 15% of the purchase price as a second mortgage. The bank would then take the first mortgage for 80%, and I had to come up with 5% cash. Banks are getting harder and harder about buyers not putting any cash down on homes, unless you go FHA, or use some other assistance program. Even with FHA, you often need to put down 3% cash.
  • Finance the Entire Amount
    This is riskier, and doesn’t really work if you have a conventional mortgage. Conventional mortgages have alienation clauses, also called a due on sale clause, which means if you convey the property to someone else, then the mortgage company can accelerate, or demand full payment, of the remaining balance. If you own the house free and clear, then this is a great option. Set your terms, get a nice down payment, and you are off and running. If you have an FHA mortgage, then you are also in really good shape to do full owner financing. FHA loans do not have an alienation clause, and are therefore very good candidates for an owner financing agreement.

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I have a house that I sold, and financed the entire amount. We charged the buyers $6,000 for the down payment, 8.5% interest, and a selling price of $95,000. We do not have to deal with any maintenance issues, and we collect approximately $200 a month in profit on the property. With good buyers and a getting a little money down, seller financing is a great method for truly passive income in real estate - all we do is send them a bill every month. But in order to get into this kind of income, you must shop carefully for properties (see my Simple Guide to Real Estate Investment Property Evaluation, for more details).

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