In today’s real estate market you hear owner financing a lot, much more than years past. That is because sellers, who need to sell, are not finding the buyers that will qualify for a bank loan and cash them out. It is a viable avenue for sellers who need to sell quickly but can wait for their money.

But what is it exactly and how does it work? And how can I do it? Seller financing is where the owner of a property agrees to lend his equity in a property to a buyer for the purchase of the home. It is just like a bank loan but the seller is lending the equity they have in the house not paper money. The title company will handle the paperwork just like a loan from a bank without the money transfer.

The title company will prepare a promissory note that states the loan amount, term of the note (length of loan), the interest rate and payments & their due date. All these factors are negotiated between the buyer and seller. A deed of trust or mortgage, depending on which state you are in, will also be prepared. The Title Company or lawyer doing the closing records these documents at the county clerk’s office.

Here is an example: Jeff owns his home free and clear. That means he has no loan on the property. Mary approaches him to buy the property. Mary has a good job but her credit report has taken a hit from a messy divorce and can’t qualify for a loan to buy the property and she does not have $1000,000 cash Jeff wants for his house. Mary asks Jeff if he will consider owner financing and waiting for his money. Jeff owns another home and does not need his money right away. The seller agrees to provide owner financing of 95% of the purchase price for 7% interest only payments for five years. So Mary at closing in the Title Company’s office brings a check for the $5,000 down payment and receives a loan from the buyer for $95,000 @ 7% interest only (payment of $554.17/month) for five years. At the end of the term, 5 years, Mary can refinance and pay off Jeff; while Jeff has gotten an income stream of $554 for the term of the note.

The seller financing can also provide financing in combination with other bank loans, or with any down payment you may have. A seller could offer a wrap loan. A wrap loan is where the seller has an existing 1st mortgage on the property and they wrap their equity around the existing loan. This is a larger loan that wraps around the existing bank loan on the property and the equity the seller has in the property. For example, John owns a house worth $100,000 and has a loan on it with a balance of $45,000 that he payments $375 per month (is a 30 year fixed loan at 5.5% interest rate). He sells his property to David and after the buyer’s down payment of $10,000 provides a wrap loan of $90,000 at 7% for 5 years and a payment of $600.00. David makes the payment to John while John makes the payment to the bank loan that is on the property. As a precaution, David makes part of his payment into a checking account that the existing bank loan withdrawal from automatically. That is to guarantee that the loan will be paid. At the end of 5 years the buyer either sells the property or refinances and pays off John.

How do you get owner financing? You simply have to ask for it. Of course not every seller will want to do it, but if you ask enough sellers you will find one who will. This type of financing can get you into a house with little or no money down and with great rates.

Michael D Smith

Michael Smith has been a licensed architect in California and a real estate entrepreneur for over twenty years. He lives in Salida with his lovely wife, Mona and their four children. He splits his time between Michael D Smith, Architect and JM2 Investment Properties. Jeff, his brother, and he are developing TwoAverageJoes.com to educate other real estate entrepreneurs.




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