How to Buy Your Next Rental With Seller Financing (No Bank Needed)

Ashley:
When rates are high and sellers run out of options, a door opens that most rookies have never even walked through. Seller financing. No bank, no traditional lender, no underwriter telling you no.

Tony:
And the best part is that you and the seller make the rules. So you decide the down payment, the interest rate, how long you have to pay it back, and literally everything in between. But that freedom is exactly where a lot of rookies get it wrong because nobody hands you the exact playbook.

Ashley:
So today we are giving you that playbook. We’re walking through the exact six steps to set up a seller finance deal from agreeing on the price to who holds the deed to how you actually make the payments. By the end of this episode, you’ll know how to structure a deal that works for you and the seller so you can buy your next rental without the bank. Okay, Tony, how many seller financing deals have you done? You’ve done a really big one actually. Welcome to the Real Estate Rookie Podcast. I’m Ashley Kehr.

Tony:
And I’m Tony J. Robinson. And with that, let’s get into the first piece. So I mean, yeah, Ashley, I think both of us have done some seller financing deals in the past before. I did mine on our first motel. That was actually the first seller finance sale I ever did. And I know you’ve done a handful as well, right?

Ashley:
Yeah. So I did one. My first one I ever did was in 2018, I bought a six unit property and then I currently have one that I’m still in right now. It’s a four-year hold and then I have to go and refinance and pay it off. So a balloon payment in four years on a five-unit building. So let’s first start off with what seller financing is. What does that actually mean? So basically the seller of the property is going to act as your bank. Just like you would go to the bank, you would get a mortgage, they would give the money to the seller, and then you would make payments to pay them back. Instead of having the bank involved, your seller is just going to take payments from you. So you’ll be making payments to them. You’ll maybe pay them a down payment and then you’ll make monthly payments as if they loaned you the money to purchase the property because in a sense they kind of did.
They didn’t get that lump sum of payment as they would if you went and got money from the bank. So that’s really what seller financing is, is that you’re not paying all of the proceeds or all of the sale price to the owner of the property, you are making payments to them. And honestly, it doesn’t even have to be payments. It’s just that they are going to be the holder of the lien on the property saying that you owe them X amount of money and then you can negotiate and set up how that money is repaid to them over time. And that is one of the beauties of seller financing.

Tony:
All right. So let’s talk now about how to actually find a seller financed deal. Now you might get lucky going on a Zillow or a Redfin and hunting and sometimes you’ll see in the notes seller will carry or open to seller financing.ou might see some of those if we’re looking at smaller single family homes. But generally on the single family side, a lot of these transactions happen through off-market deals. This is generally what I’ve seen as I’ve talked with other investors. I will say on the commercial side, I’ll tell you the story of how we found our first one. On the commercial side, it is much more common I think to see seller financing seller will carry in the listings, especially if you’re targeting, like we were, properties that are older, these kind of mom and pop run type properties where their books aren’t great.
And the reason that folks are, at least what I’ve seen, are more willing or just easier to find on the commercial side is that if I’m selling, in our case, a 13 unit motel and I don’t necessarily have the best bookkeeping, as someone tries to go purchase that property and they want to use some sort of traditional debt, well, generally banks want to see good books and maybe two years of tax returns from the seller. And if my books are scribbles on napkins and loose receipts, it becomes a product that’s a lot harder for a bank to finance. So the seller, if they actually want to move the product, a lot of times they understand, man, we have to offer seller financing if we want to widen the pool of people who are actually able to purchase our property. And that was the exact situation for us.
We found our property on, I think it was Crexi, it was listed for the entire world to see and we were able to negotiate seller financing through there. But that’s generally what I’ve seen. What about you Ash? Where are you finding or where have you found your seller finance deals?

Ashley:
Mine was mostly from just asking if the seller would be open to seller financing. So my first deal was direct with the seller and asking that. We sat down at a restaurant and talked over his properties. It was a portfolio he was selling and I had two offers. I had one that looked like if I had to go and get traditional bank financing and then I had one that looked like seller financing and I said, “Here are my two offers.” The offer with seller financing was higher than if I had to go and get bank financing. And I presented both to him and he said he would think about it and get back to me and then called me the next day and said he was going to do the seller financing. For the other bigger deal, the five unit that I did, this was on the MLS.
So it went through the agents asking if they were open to seller financing. This property had been on the market for a long time. It already fell through twice a buyer’s backing out on the deal. So this was definitely a motivated seller in this scenario. But there are some websites, like I think landwatch.com is one where you can actually select a filter that says owner financing. So owner financing, seller financing, same thing, just different wording. You can select a filter and it’ll actually filter through properties where the person selling has already said they will consider doing this. So that’s a great place to look if you absolutely want to do seller financing too.

Tony:
I’ve also seen actually there are a lot of Facebook group out there where folks are promoting here’s some seller finance deals. So obviously anytime you’re really hunting for deals in Facebook groups, there’s a lot of noise in there as well. So you got to really sift through the noise. But for a lot of folks that I know that tend to go seller financing, a lot of times they’re going after two things. Number one, expired listings on the MLS. So if something’s been listed for a while, it didn’t sell at whatever price they were maybe initially looking for, whatever the reason is, going back and targeting those expired listings or just direct mail where you’re looking at properties where there’s been one owner for 15, 20, 30, 40, 50 years and there’s a good likelihood that those properties have been paid off. But generally I’ve seen it works best going direct to seller.
We actually just interviewed Ash Reginald Calloway and he had this incredible story, but his first rental property was a commercial property and it was the landlord for the building that he was already renting for his wife’s daycare. And as he was paying his rent one month, just out of nowhere, he spur of the moment asked the landlord, “Hey, would you ever be willing to sell this thing?” And the landlord said yes and gave him a price right there. And in that moment, they basically went under contract on him buying the property. So maybe if you’re already renting a place, whether it be single family or commercial, maybe just asking the landlord like, “Hey, what would you let this place go for?” That could be a good strategy as well.

Ashley:
One thing that I like to do when I’m talking directly with the seller, this works best with this, is ask them if they’re open to seller financing. And if they say yes, great, you can talk more. If they say no, I always like to follow up with, okay, I was just wondering if your CPA or tax planner talked to you about the tax advantages of it. And then that just kind of leaves it open-ended and hopefully gets their wheels spinning and hopefully they go and talk to their financial advisor, their tax advisor who will tell them the benefits of them by doing seller financing instead of taking this lump sum of cash in one tax year and being taxed on it because it’s going to sound better coming from somebody they trust and already work with than somebody who’s trying to get a good deal on their property.
So I always drop that and see if it leaves some interest that they’d be open to doing that. And that has worked for me before. So that’s always an option for you there too, instead of just directly saying, “Will you do seller financing?” Kind of ask, “Are you open to it?” And then follow up with that kind of note on it. But Tony, let’s go into the pricing on a seller financing. Where do you even start compared to if you were going and getting a traditional bank loan on the property? And I think for me, I like to look at multiple options of doing seller financing is a huge benefit to me. It’s also a benefit in a way for tax strategies and things like that for the seller of the property. But they’re also not getting a ton of cash or a huge lump sum upfront like they would be if somebody else was going to get a mortgage.
So in my scenario, I’m usually willing to pay more if they are willing to do seller financing than I would if I had to go and get a bank mortgage because then I have to jump through all the hoops, so the time, the inconvenience, the inspections, all of that. Then also if I am having the interest rates that banks are charging and I can get a lower rate doing the seller financing, then that’s more of a benefit to me. So I weigh out the pros and cons and paying more doesn’t mean I’m paying more than what they’re asking. Paying more just means I’m going to probably be able to make my numbers work better by offering the seller financing so I can pay more. Think of COVID prices when interest rates were really, really low, people could pay a lot more because their payment would be less.
So kind of use that scenario when you’re gauging, but you want to run your numbers with both scenarios to make sure that you’re not overpaying just to get that seller financing.

Tony:
It was a very similar situation for me, Ash. I’m sure I took this advice from you, but when we did the seller financing on the motel, we did give them two options. Option one is, “Hey, if we have to go out here and get some expensive bridge debt, here’s a much, much lower price. Hey, and if you’re willing to seller finance, we can save on some of those costs. Here’s a higher price that’s closer to what you’re asking for.” And we went back and forth quite a bit on the numbers, but they eventually took the option of, “I’ll take the higher price at the seller financing.” And I can’t say that I know exactly what their motivations were, but I believe that part of their motivations were is that they liked the idea of consistent cash flow coming in on a monthly basis. They didn’t have to deal with the asset anymore, yet they were still benefiting on an ongoing basis from seller financing the deal.
So every rookie that’s listening, I would say offers something similar. If you want seller financing, make seller financing the more attractive offer and make, “Hey, if I got to go out and get normal debt, make that a much, much less attractive offer.” Now, the other terms that we can negotiate as we’re going through seller financing, obviously one is the price, but the other term is the rate. What are they charging you for the money that they’re giving you? And when we did our first seller finance deal, our rate was or is 7%. So it was a slightly higher rate, but because of the other terms, you were willing to accept that. And the other piece that we were able to negotiate is that the first, I believe it was three years, was interest only. So we knew we were going to spend a good chunk of time renovating this place, trying to get it back to today’s standards, and it was going to take us a little bit of time to get the whole thing operational and running at full speed.
So those three years of interest only meant that our mortgage payments were slightly reduced as well. So that freed up some more cash flow for us. So negotiating the rate is another one of those levers. So sometimes you can say, “Hey, I’ll give you a higher purchase price, but I want a lower interest rate.” Or you can say, “Hey, I’ll give you the higher purchase price, but I want to…” Those things can move in inverse of each other. And for you, it’s trying to understand what do you want to maximize for? Do you want a lower monthly payment? Do you want less cash out of pocket up front? And that’s how you can balance those two things together to make it make sense for both of you.

Ashley:
I once was trying to buy a property on market. So my agent went to the other agent and said she would like to do seller financing and it would be offering around, I think I said maybe 4% or whatever. And the agent laughed to my agent and said, “Well, that’s way below what the market interest rate is.” And so I said, “Exactly. That is the benefit of me being able to offer this purchase price, and that’s why you have no other offers.” I mean, I didn’t say this, but no other offers because no one is willing to pay that price when they can only go to the bank and get these rates and the deal doesn’t make sense. But if your seller really wants this purchase price, this is the way to make it happen. So I think there’s also, if you’re buying on MLS, it is harder to get it done, especially if agents aren’t familiar with seller financing and how it works and how to set it up, but also the fact that you are now playing telephone.
It’s going from you to your agent to their agent. So it’s very hard to communicate the benefits and make it sound like this wonderful thing for the seller to actually want to do it and to understand where you’re coming from by having all of those middlemen too. But I always shoot lower than what interest rates are because they’re most likely going to still be getting more than what they would if they just took that lump sum and put the money into a high yield savings account. They’re still getting more from me. And then I also think, okay, they could take that money, they could invest it, they could do other things, but especially if I’m working directly with the seller, I always try and find out what are they doing next? What are they actually going to do with this lump sum of money? And if they don’t immediately need it for anything, then this is a great tool.
Or maybe I can structure the down payment so that they’re at least getting what they need for that next thing and then I can still do the seller financing on the rest.

Tony:
On that note, Ash, let’s talk a little bit about the down payment because it’s one of the other terms that are important. Because this is seller financing, there is no set figure that the down payment has to be. And there are a lot of folks who go out there and get seller financing with nothing down, with zero down. There are some people who go out there and get seller financing for 1% down. I’ll tell you how it played out for us is that we put down about 20%, but the reason that we put down that much is because they needed to pay off the existing loan balance in order to be able to offer us the seller financing that we were looking for. So again, as we kind of weighed the pros and cons of going with them versus going with traditional financing, even though the down payments were about the same, the other terms we were able to negotiate ended up working in our favor.
So for us, we gave them a bigger down payment and they gave us a break on the price. Again, the interest only term for three years. The rate was reasonable given rates worth time. So we felt good about that plan. But again, I would start with zero, start with nothing and see what their response is to that. But that’s the benefit of seller finance, that there is no right or wrong answer. It’s whatever you and the seller agree to. So the other piece too, in terms of the terms that we can negotiate is the amortization period and the actual term of the loan. So the amortization period is how many years are we spreading out those payments? So a typical mortgage has an amortization period of 30 years or 15 years or sometimes every 20 years, but you hear a 30-year fixed mortgage, that means it’s being amortized over 30 years.
So what that typically does is the longer your amortization period, then the lower each monthly payment is. That’s when you think about 30-year loan, those payments are more affordable than a 15-year loan, which is why so many people go for the 30-year. So a longer amortization keeps your payment lower. It means you pay a little bit more interest upfront, a little bit more interest over the life of the loan, but the actual monthly payments themselves are generally lower. Now, you can set up a 30-year amortization period, but maybe the actual balloon payment, when the balance is due can happen sooner. So again, I’ll give you guys an example. For our seller finance note, we had, I believe, a 25-year amortization period, but we have a 10-year balloon period. So that means that at year 10, even though we still have 20 years left of amortization, the note is actually due and we have to either sell or refinance that property to then pay those sellers the balance of what’s due at that point in time.
So that was another reason that we liked the seller finance moves because it gave us a long enough window with these favorable terms to establish the property, really get the operations running, increase the value. So that way when we want to refinance, we’ve got almost a decade to try and figure that whole thing out and we’re not under the gun because the bridge debt, maybe you get two years or five years maybe even, but that can still sometimes be tight. But over the course of a decade, we presume that we find the right point during that decade to refinance and get out of the property or refinance and pay them back whether we keep the property or not. So just know amortization and when the actual loan comes due, those can be two different things.

Ashley:
And it can often be called the balloon payment where you are going to be paying the remainder balance of the loan or it could be a portion of the loan. So I set it up once before I structured it where the person actually in year two wanted $20,000, then in year three, another $20,000 lump payment. And then I think it was year six or something would actually be the big balloon payment to pay it off. So you can actually structure the balloon payments any way you want also that work for you and the seller, but this is where a lump sum will be paid sometime during that amortization period. And it could be all of it, it could be a portion of it at that time. So the next thing that you could consider in your loan, and I recommend trying not to have this, but if this is something that makes the seller feel better about the amount of money they’re going to make on the interest, you could implement a prepayment penalty stating that you will not pay off the loan during a certain amount of time.
And if you do, you will pay them a percentage of that balance that you are paying off. A lot of DSER loans have this now where if you repay the loan in year one, year two, maybe all the way up to within the first five years, you could be paying 2% of that loan balance you’re paying off 1%, 3%, 4%, 5%, whatever that is. So a prepayment penalty, obviously try to avoid it if you can, but if you know, like Tony said, he knows he’s going to hold this seller financing for a while, not a bad thing to then put in the prepayment penalty for at least two years if it’s going to help the seller feel better about the deal.

Tony:
The other piece to consider are taxes and insurance. On our seller finance deal, we are responsible for our own insurance and paying all of our property taxes. I would encourage you to set up that same way as well. That way you’re not relying on the seller who maybe doesn’t have as much of a vested interest anymore, that you’re the one who’s in control of getting all those things paid. Now, things like property taxes can get a little trickier if you’re doing a sub two deal. I guess you could just change the billing address to go to you, that way you’re the one who gets the bills and you’re paying them yourselves. But generally speaking, I want to be in control of taxes and insurance because those are two important things that we need, right? Because even if you’re seller financing and no one’s paying the property taxes, now you get a lien on the property and that creates more issues for you.

Ashley:
Yeah. And as the owner of the property, if you are taking over the deed when you’re doing the seller financing, then you are going to want to make sure the payments are being made. And as the lien holder, also for the seller, they may want to know too that the property taxes are being paid. So there are third party services that could set up basically an escrow account, just like you’d have at a bank where you can make the monthly payments to them and then they will pay out your property taxes and your insurance too, and then notify the seller of the property that those are being paid out. So that also could happen too, where you’re prepaying that account in full on closing and then you’re going to continue to make payments on it.

Tony:
Yeah. And that’s what a normal lender will require anyway as you’re paying those things up front because it helps them protect the asset. They want to make sure that the property’s properly insured on the exact day and time of closing.

Ashley:
Well, and too, if you don’t pay the property taxes, the county is going to come after you to take that property and then if they go and sell it at auction, the lien holder, the seller of that property, they may not get what they’re actually entitled to depending on what the property actually sells for. So being tax delinquent is not in the favor of the mortgage holder either.

Tony:
Now, what happens about late payments or what happens if you default on the loan? Just making sure that you have those things very clearly laid out in the note that you set up between you and your seller who’s financing the deal for you. You want to think about this as like any other mortgage because that’s basically what it is. For us, our entire transaction was recorded at the county. So even though we didn’t go to Bank of America, there’s still a lien against the property by the sellers. They have a note against the property where if we default, they have the ability to foreclose on the house or foreclose on the property and take it back from us. For the seller finance deals that you’ve done, Ash, do they have actual liens against the property?

Ashley:
Yes. I have done private money where it’s not the seller where there wasn’t actual liens, but for the actual seller finance deals, those, yes, were all liens on the property and filed that way. Now, another thing to be cautious of when doing this is what if the seller wants out early? We talked about what if you want out early by paying off the loan. If you have a prepayment penalty, you have to watch out for that. But what if the seller wants out and you have an agreement, so contractually you do not have to pay them if they want out of that agreement? Here’s a scenario for you. So my one friend had a purchase of their primary residence seller financing. They bought it from this person and they moved or whatever and he made his payments, never missed payment, was never late. Well, the property owner that he bought it from ended up passing away.
So then he started making payments to the wife who had survived him, making payments, making payments, making payments. Several years later, she also sadly passes away. Now, when that happens, their children and the adult children come to him and say, “We don’t want to do this. We want you to pay us the balance that you owe.” So he starts panicking because it is still a large lump sum of money and he doesn’t know where he is going to get it from. But I said to him, “You don’t have to. You have a contract, you have an agreement, and that carries forward.” So he ended up winning it that he did not have to pay them back that lump sum of money. It didn’t even end up going to court, just the lawyers talking. He has a contract, has an agreement. They inherited the agreement, not that they were entitled to be paid off directly.
So in that scenario, make sure in the contract you are reading, if there is some kind of clause, obviously there should be maybe a due on sale clause where if you do sell the property, they are paid off. But if you want it enticing for someone else to buy the property, you could put in there that it is assumable that you could transfer over this mortgage to someone else and what the criteria would be for that. But that’s also something to make sure the wording is in there, what happens if the seller does want out of this seller financing. And in my scenario, I want to say, no, there is no way out unless it’s agreed upon and negotiated where they just can’t tell me like, “Hey, you want to be paid back in six months. You have six months to pay it in full.”

Tony:
So those are all the different levers that you can pull as you’re negotiating seller financing and putting your terms together. And don’t just assume that the highest purchase price is always going to be the worst deal. Again, if I can get a higher purchase price, but a lower interest rate, five years interest only, $0 down, maybe this ends up becoming a great deal for me at a slightly higher purchase price. So the goal is how can you massage and adjust these numbers to find the combination that ends up working best for you?

Ashley:
Now, you’ve learned a lot about seller financing, hopefully during this. And with the age of AI, you can definitely have AI help you create and put together a seller financing agreement. Before you actually do that though, I would start with a letter of intent. So this is just your proposal of the terms before you go out and build a full on contract. So create the letter of intent, which is basically the property address, what the terms of the purchase would be as to you’re going to offer 225,000, $25,000 payment, 200,000 seller financing amortized over 15 years with a balloon in five years, and then four and a half percent interest rate with no prepayment penalty. Just a rough example. This letter is contingent on attorney approval, and then you both can sign it. Any other contingencies or things like that you’d want to put in there.
But I would start with a letter of intent. Then after that, you can go and create your contract. In this scenario, I would not have AI put the contract together. I would go to an attorney to actually do this. In New York State, you have to use attorneys for closing anyways. So an attorney is going to review your AI agreement or just say, “No, we’re using the agreement that I use and that I put together,” and then pass it back and forth between the attorneys to get signature from you and the seller. But definitely have an attorney overlook this agreement because a lot of people create lease agreements in AI and I think it’s a great, great tool, but a lease agreement is over $800 payment per month where this is over most likely a hundred thousand or more payment of purchasing a property. So I would definitely use an attorney in this scenario.

Tony:
Yeah. We definitely brought in attorneys for ours as well, someone who was specific to that state because we were buying in a state that we don’t live in. So we just wanted to make sure that we had an expert as we put all these things together. And the other piece too is on the back end, the servicing side of it as well, just making sure that you guys have like, “Hey, how are we going to make these payments to you? And what does that process look like and who’s tracking the loan balance and what does that look like?” So I believe we paid, I think it might have been the escrow company, a small fee for them to be the loan servicers to make sure that everything’s getting handled correctly. So you can do it however you want to. There are options out there to help handle that piece as well.
And then the next kind of really important step of this whole process is the other paperwork.
The other reason that an attorney becomes very valuable is to make sure that if you do this whole seller financing strategy, that you actually end up becoming the owner on paper of this deal. And one missed signature or some piece of paperwork filed incorrectly, and you give this big down payment and you start making all these payments, but you actually don’t own the property in the eyes of the city or the county. So just making sure that you get all those things done correctly. So what we did and how we set it up is we actually did transfer title. So my entity is the named owner of this property. And again, there’s a lien, so the sellers have a lien against the property to say, “Hey, we loaned Tony X number of dollars and here’s what he owes us. And hey, if Tony doesn’t pay, then we can foreclose in the property.” So the lien is recorded, the deed was updated to show myself or my entity is the owners, and that’s how we get a really clean paper trail to make sure that everything lines up with what we agreed to.

Ashley:
Well, thank you guys so much for joining us for this episode on seller financing. If you’re doing a seller financing deal, let us know in the comments on YouTube, but we’d love to hear about it. I’m Ashley Hayes Tony, and we’ll see you guys on the next episode.