Thursday, March 10, 2011

Never rule out seller financing

I got an e-mail this week from a reader who wants to invest in income-producing real estate. Without going into all the details, he seems well-versed in construction and could handle repairs himself … a very important aspect of becoming a landlord. However, he lacks the cash for a sufficient downpayment and is considering taking out an equity loan on his home to come up with the funds. As an alternative, I suggested he consider seller financing. But he is concerned that that is too risky. Here is a recap of my reply: Sean, you’re right … seller financing can be risky. To me, a big risk is that sellers generally will only provide short-term financing. For example 30-year amortization with a 5-year balloon. That could leave you scrambling in five years to find financing. And you might have to pay a higher interest rate than what banks charge. Plus you don't have much negotiating power on the price when you're asking the seller to carry the mortgage. But I'd rather take the risk of possibly loosing a rental property back to the seller than risk loosing my homestead. The key is to do your homework and carefully look at every potential expense that could impact the cash flow. You just might come across a seller who owns the house outright and has to move. Could be because of job relocation, personal reasons ... you never know. If the price is right and you strongly believe that you can generate enough positive cash flow to accumulate a decent down payment over the course of a few years, you could be in a position to get a conventional loan by the time the balloon is due. Anyway, never rule anything out, including seller financing, especially when you don’t have enough cash for a downpayment or otherwise can’t qualify for a traditional mortgage. Best wishes, George

No comments:

Post a Comment