Seller Financing has likely become the single most talked about real estate investing tool in the past few years due to the lending restrictions banks have placed on our industry. Just this past week, a banker told me real estate investing is now considered a “hobby” meaning it is not considered a lending option for banks right now. With that said, wise investors are turning to various aspects of seller financing. What needs to be clarified are the different types of seller financing methods available to you.
Let’s take a look:
3 Approaches to Seller Financing Lease-Option:
Probably the most common approach investors have used throughout the years.
You are able to approach sellers and lease a property with the end goal of purchasing the property for an agreed upon price.
These investments give investors a predetermined amount of time to exit the property and make a profit.
Andrew C. MacDonald contributes excellent posts on lease option exit strategies . I highly recommend reading his work and others for more details. Subject-To: The term subject-to sparks strong opinions and debate immediately. The goal of subject-to is to acquire a property with no-money down.
This allows you to take over the mortgage payments and you are responsible for satisfying the balance of the mortgage. However, the mortgage is still in the seller’s name. There is great debate as to the specifics of subject-to deals and the “Due on Sale” clause.
Jason Hanson’s posts are a great source of information on this unique seller financing concept. Land Contracts: This is my favorite kind of purchase and sale. A land contract is simply a mortgage between the seller and buyer. The two parties agree on down payment terms, monthly payment terms, interest rate, and length of contract.
At the end of the term of payments the buyer owns the property outright and the seller no longer has rights to the property. This is a great strategy when properties can be purchased on contract with tenants in place who essentially pay the mortgage for you. As you can see there are many levels of seller financing and we barely scratched the surface.
Each scenario varies in the amount of ownership of the asset and the deed. Each has a purpose and can be an important part of your investing career. I recommend studying how each financing model works and using these strategies when putting in offers. It will keep money in your pocket and increase the profits in your portfolio.
The strategy has been gaining popularity thanks to the numerous benefits of rent to own for each party in the transaction. There are two fundamental approaches to putting these deals together; the tenant first approach or the property first approach. There are many investors using each strategy and each has its own advantages and disadvantages.
Tenant First Rent to Own As implied by the name, the first step in the tenant first strategy is to find a qualified tenant-buyer who is going to rent to own a property and intends to buy it out at the end of the lease term. This is easier said than done, and it generally takes a lot of filtering to find qualified applicants with realistic expectations. Once a suitable tenant-buyer has been located the investor helps them find a property that meets their criteria and pre-established budget.
When the investor has both a tenant-buyer and the right property, they can either close themselves or bring in another investor as a money partner to fund the deal. Property First Rent to Own Again as the name implies, property first rent to own means you start out with a property and then find a tenant-buyer. You may opt to use this method if you already have a single family rental and are considering rent to own, if you get great deals on properties through Quickturn style real estate, or if you just have a single family home with good curb appeal that you think would work well as a rent to own.
With this strategy, the specific property is marketed as rent to own and the owner will usually do showings, take applications, and filter prospects similar to the usual rental process. Even with an attractive property, sifting through a large number of applicants is usually required to find the right tenant-buyer for the property. The nice part here is that the property is usually available and your tenant-buyers can get into their new home right away. Pros and Cons I tend to prefer the tenant first strategy, but each investor has their own opinion and there is no right or wrong way to do it.
Some of the things I like about tenant first rent to own are: Filter tenants first to avoid working with tire kickers Tenants select their own home to suit their needs Can have tenants take on more upfront expenses (eg. property inspection) No vacancy since tenants take occupancy when you close On the other side of the fence, property first has a few benefits of its own: Purchase below market value Buy in locations you like best Tenants can move in immediately If you have a large list of tenant-buyers in a specific area, property first can work well.
The main risk I see is having the property sitting vacant waiting for the right tenant-buyer to like that specific property. As a conservative risk adverse kind of guy, the certainty of the tenant first strategy clicks for me. What is Your RTO Strategy of Choice? I’d love to hear more on which rent to own strategy readers prefer. Do you like tenant first or property first, and why ?