Seller financing is an incredibly powerful and profitable tool for selling real estate.

This doesn't mean it's always the best tool for every situation, but when you have a solid equity position in a property (when you own it free and clear or have a very flexible loan with a low outgoing monthly payment), and when you're willing to deal with the added complexity of getting paid off in installments, it has a lot of benefits to offer.

One of the biggest advantages is how it can boost your profitability over time.

When I started using it, it allowed me to create several streams of passive income that required virtually no work from me on an ongoing basis as long as I had found a good borrower and they continued to make their monthly payments as agreed.

Becoming the Bank

Seller financing is essentially the same as “lending money” to the person buying your property. In essence, you are becoming the bank when you finance the sale of real estate in this way.

Dictionary.com defines “lend” as,

to grant the use of something on the condition that it or its equivalent will be returned.

Did you notice that “cash” or “money” weren’t mentioned anywhere in that definition?

How Seller Financing Works

When you finance the sale of a property you own, you aren't advancing any actual dollars to the borrower. You are simply granting the permanent use of your property and accepting payments for it in the form of cash over several months or years in the future.

You're simply delaying when you'll receive your money from the buyer, and you're stretching out over a period of time.

These payments typically include principal, interest, and ongoing servicing fees for the life of the loan (and remember, you can also collect a reasonable amount of closing fees when you initially close the transaction).

Seller financing is a fantastic tool because it allows you to do any or all of the following things with your real estate:

• Sell your property at a significantly higher price.
• Make substantial extra income from interest, servicing fees, and closing fees.
• Wash your hands of the property’s ongoing maintenance issues by putting these problems in your borrower’s lap (after all, they're the property's new owners).
• Add significant stability and peace of mind to your business operation with a dependable monthly income.
• Charge prepayment penalties if or when the borrower chooses to pay off early.
• Repossess and resell the property if the borrower ever defaults on their loan.

Why Isn’t Everyone Doing Seller Financing?

When I first heard about seller financing, I hesitated to sell my inventory this way. The whole idea seemed complicated, confusing, and even scary. My mind was filled with uncertainty and skepticism.

My mind was filled with uncertainty. I kept telling myself things like:

Let's keep this simple! Why over-complicate things?

I don't understand all the math, banker terminology, and finance lingo (What the heck is an Amortization Schedule??)

I'm not a bank! How can I keep up with servicing a loan, invoicing payments, handling missed payments, and so on?

Why would I want my properties stuck in limbo for years as I slowly get paid off? Wouldn't I be better off getting a lump sum of cash?

What if one of my borrowers stops paying me? How am I supposed to repossess a property?

Granted, some of these questions and thoughts are legitimate things to think about, but if you can also see the full upside of seller financing, the advantages can easily outweigh the downsides.

When Is Seller Financing Appropriate?

Seller financing isn't always the right choice for every deal.

Even though I'm fully aware of its advantages and how to do these deals, there are plenty of situations when I still don't want to go down this road because I understand my goals and priorities, and seller financing doesn't always fit with my objectives.

You should also understand your goals and priorities so you can make this decision for yourself with each property you sell.

Here are some of the criteria I use to determine when seller financing makes sense for the properties I'm trying to sell:

• When I have a strong equity position in a property (e.g., I own it free and clear).

• When I can sell a property for FAR more than I paid for it (this can work great with quick flips).

• When I'm stuck in a buyer's market (i.e., real estate is moving very slowly, and buyers are difficult to find).

• When banks aren't willing to lend on the type of property I'm trying to sell. This often happens with vacant land, where banks don't like originating loans under 100k. It's a bit of an annoyance but also opens up a BIG opportunity for land investors.

• When banks won't lend to anyone due to market conditions in general (this was a common issue back in 2008 – 2011).

• When my buyer is willing to pay the full asking price, they can come up with a good down payment (20% or more of the sale price, maybe higher if they have a low credit score), but they don't have all the cash to buy my property, and they don't fit the exact profile that a bank wants to see.

Don't get me wrong, I don't need ALL of these conditions to be met, but usually, when I see two or more of them, I'll know I'm looking at a good seller financing scenario.

Opening the Doors of Opportunity

When you list your property for sale and offer seller financing as part of the deal, you'll find that many more buyers will start reaching out to you. MANY more than if you were only willing to accept the full sale price in cash.

Why does this happen? It’s simple. By offering seller financing, you make this property significantly more attainable for the buyers in your market. Seller financing will open the doors of opportunity to many people who otherwise wouldn't be able to purchase your property at all.

This doesn’t necessarily mean that your buyers won’t be creditworthy. This is why it’s important to understand how banks work.

How Banks Lend Money

Most lenders offer financing to a broad demographic of people for various purposes (one of which happens to be real estate). Very few bankers can approve loans on their own authority. Given a bank’s situation, with hundreds of loans on their books for different purposes—who can blame them?

Instead, banks evaluate every borrower using some pre-determined criteria called the 5 Cs of Credit:

1. Capacity to Repay: Does the borrower have the resources to repay the loan?
2. Capital Invested: How much “skin” does the borrower have in the game?
3. Collateral Availability: Will the bank be able to cover themselves if the borrower stops paying?
4. Conditions: What is the intended purpose of the loan?
5. Character: How does the lender perceive the borrower? Is the borrower a good person? Are they trustworthy?

Many times, prospective borrowers aren’t able to qualify for loans simply because they don’t fit into one or more of these five boxes.

In addition to the 5 Cs of Credit, banks look at many other things when considering lending money to a prospective borrower. They generally want to see the following:

• A solid credit score (most lenders consider the 700+ range “good” and 600+ to be “acceptable”).
• A proven level of historical income (years of employment, dollars earned per year, etc.)
• A minimum sum of cash available for a down payment (usually 20% or more).
• The asset (the property in this case) should meet specific criteria (size, condition, built-to-code, etc.).
• Its value needs to be supported by a current appraisal.
• The property usually needs to be situated in the right geographic location.
• The property’s chain of title must be flawless.

And the list goes on.

What Seller Financing Does Differently From Banks

The real kicker is that I’ve seen a lot of would-be deals get completely blown up—all because the loan applicant was missing one small item on the banker’s checklist of qualifying criteria. Everyone goes home sad, and it’s a shame.

Measuring tools like the 5 Cs of Credit do matter. The fact is, some people should be disqualified. For instance, if somebody has no income and is a convicted felon, that probably represents a character issue and their capacity to repay (and these are both extreme examples, by the way).

On the other hand, if somebody has one “blip” on their credit report, most banks simply don't have the freedom to see past this. Banks are very risk-averse, and as a rule of thumb, they won't lend money to a borrower unless there's practically zero risk in the deal.

It’s unfortunate for the loan applicant, but the advantage that YOU have as the lender is that even when a person doesn’t fit into all of these boxes, they still may be a viable candidate for a loan! Unlike a banker, you can think critically and consider ALL the factors with your buyer.

I’ve seen a lot of inflexibility from banks over the years. Ultimately, many of my buyers will never be able to buy my properties unless I am willing the finance the sale for them.

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