Seller Financing and Real Estate

Depending on your individual circumstances and overall real estate investment goals, seller financing may be a great option for you. Seller financing refers to the process of having the person selling the real estate also provide financing.

Seller Financing Real Estate

Market performance is a key indicator because, if the real estate market is doing well and banks are lending significant money for mortgages, then this may be a less attractive investment option. On the other hand, if banks are reluctant to lend money and the market is slowing down, that may the right time to explore your options.

Know the Advantages and Risks

Like with any investment, there are always advantages and risks to explore, and the same is true for seller financing. One of the biggest advantages of this option is that you, as the seller, can often charge a higher interest rate. This means you may be able to make more money from your property than you originally invested. The major risk associated with this approach is the potential for borrower default.

To determine if this strategy is ideal for you, first learn how to really analyze the market trends.

Hud Loan Programs for Apartment Syndicators: Everything You Need to Know

Hud Loan Programs for Apartment Syndicators: Everything You Need to Know

Let’s talk about one of the top loan program providers that apartment syndicators use on their deals: Hud.

Hud can be a great option for apartment deals. We’re going to cover each of their common loan programs, including their permanent, refinancing, and supplemental loans.

Loan 1: 223(f)

The first Hud loan, which is the permanent loan, would be the 223(f). This is very similar to agency loans, except for one major difference: processing time. Plus, the loan terms are actually a little bit longer. So for the 223(f), the loan term is going to be lesser of either 35 years or 75% of the remaining economic life. 

So if the property’s economic life is greater than 35 years, then your loan term is actually going to be 35 years. It’ll be fully amortized over that time period. Whatever the loan term is what the amortization rate will be. If you’re dealing with a smaller apartment community under the $1 million purchase price, then this is not going to be the loan for you.

In regards to the LTVs, for the loan-to-values, they will lend up to 83.3% for a market rate property, and they will also lend up to 87% for affordable. So that’s another distinction of the housing and urban development loans, which is they are also used for affordable housing. There will be an occupancy requirement, which is normal for most of these loans. 

The interest rate will be fixed for this loan, and then you will have the ability to include some repair costs by using this loan program. For the 223(f) loan, you can include up to 15% of the value of the property in repair costs or $6500 per unit. If you’re not necessarily doing a minor renovation, but if you’re spending about $6500 per unit overall, then you can include those in the loan.

The pros of this loan are that they have the highest LTV. You can get a loan where you don’t have to put down 20%; you can actually put down less than 20%. It also eliminates the refinance as well as the interest rate risk, because it is a fixed rate loan, and the term can be up to 35 years in length. You won’t have to worry about refinancing or the interest rate going up if something were to happen in the market. 

These loans are non-recourse as well as assumable, which helps with the exit strategy. There’s also no defined financial capability requirements, no geographic restrictions, and no minimum population. There’s essentially no limitation on them giving you a loan for a deal if the market doesn’t have a lot of people living in it or the income is very low. 

There are also some cons involved when considering a Hud loan. The processing time is much longer than some. The time for a contract to close is at a minimum of 120 days to six or nine months is actually common. Other loan providers have processing times between 60 and 90 days. Hud loans take a little bit longer to process. They also come with higher fees, mortgage insurance premiums, and annual operating statement audits.

Loan 2: 221(d)(4)

The next Hud loan is 221(d)(4). These are for properties that you either want to build or substantially renovate. 

Similar to the 223(f) loan, these loans do have very long terms. The length of the loan will be however long the construction period is, plus an additional 40 years. That is fully amortized. 

This isn’t the loan for smaller deals, because the minimum loan size is going to be $5 million. So if you have a deal that you want to renovate and has got a $1 million purchase price, you’re going to have to look at some other options. 

Similarly, this is for market-rate properties as well as affordable properties, with the same LTVs of 83.3% and 87% respectively. These loans are also assumable and non-recourse as well as fixed interest with interest-only payments during the construction period.

The CapEx requirements for this loan are quite different than the 223(f). For the 223(f), it was up to 15% or up to $6500 per unit, whereas for the 221(d)(4) loan actually needs to be greater than 15% of the property value or greater than $6500 per unit. 

The 221(d)(4) pros and cons are pretty similar to the 223(f) pros and cons. There’s the elimination of the refinance and interest rate risk, because of that fixed rate in a term of up to 40 years. They’re also higher leveraged than your traditional sources. Those longer processing time and closing times can be a pain. There’s going to be higher fees, and you also have those annual operating audits and inspections.

Loan 3: 223(a)(7)

Hud also offers refinance loans as well as supplemental loans for their loan programs. Their refinance loan is called the 223(a)(7).

If you’ve secured the 223(f) loan or you’ve secured a 221(d)(4) loan, you’re able to secure this refinance loan, and it has to be one of those two. You can’t go from a private bridge loan to this refinance loan– that’s not how it works.

The loan term for the refinance loan is up to 12 years beyond the remaining term, but not to exceed the term. If your initial term was 40 years and you refinanced at 30 years, then this refinance loan will only be 10 years, because it can’t be greater than 40 years. 

It will be either the lesser of the original principal amount from your first loan, or a debt service coverage ratio of 1.11 or 100% of the eligible transaction costs. These loans are also fully amortized. The occupancy requirements are going to be the same as the existing terms for the previous loan. These are also going to be assumable and non-recourse with that fixed interest rate.

Loan 4: 241(a)

Hud also has a supplemental loan program available, which is the 241(a). This is only probable if you’ve secured the 221(d)(4) or 223(f). 

The loan term is coterminous with the first loan. Whenever you acquire it, it’s just going to be the length of the remaining loan. You’re essentially just adding $1 million or $5 million to your existing loan. 

Your loan size can be up to 90% of the cost of the property, so essentially a 90% LTV, because you need to have at least 10% of equity in the property at all times. It’s going to be fully amortized. 

They’re also going to base the loan size on the debt service coverage ratio. Because of this, it needs to be 1.45. That’s a ratio of the net operating income to the debt service. Then, the minimum occupancy requirements are going to be the same as whatever the terms are for your existing loan. Like all the loans, they’re assumable, they are non-recourse, and the interest rate is fixed.

And that’s it for Hud loans! What do you think about taking out loans through Hud for real estate purposes? Tell us what you think in the comments below!

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How a Yogi Finds Seller Financing Deals


If you don’t have a w2 job or have reached your traditional loan limit, how do you fund your deals? While there are many creative lending options, from private money to hard money lenders, one attractive strategy is seller financing.


Jeremy Jones, who has been a multifamily investor since 2012, has done 7 seller financing deals. In our recent conversation, he explained the best ways to find seller financing leads and the types of properties that are the best seller financing candidates.


Seller Financing Lead Source #1 – Word of Mouth Referrals through Relationships


Jeremy’s found his largest seller financing deal, an 8-unit apartment, through a relationship. “A broker friend of mind and then a broker that he was introducing to me,” he explained, “we were all in the car driving around and he said ‘hey the people that own that apartment reached out to me. They may want to list it, and they may be willing to carry the note.’” The broker ended up listing the property. Jeremy put in an offer immediately and was awarded the deal.


Besides the 8-unit, Jeremy found three other seller financed deals through relationships. He said, “[I] found [deals] through word of mouth, like a wholesaler, someone that I met at a foreclosure auction, and a broker who knew I was looking for seller financing.”


How did Jeremy create these relationships? “You have natural opportunities to talk about what you’re doing when you start to invest and it plants seeds in the mind of others,” Jeremy described. “Sometimes ideas come to them and they say ‘oh Jeremy might be interested in this!’”


During conversations, especially with brokers, Jeremy will say “I’m looking for multiunit buy-and-hold properties with the possibility of seller financing.” That way, when an owner approaches a broker with a listing and mentions that they are open to seller financing, the broker can respond by saying, “oh I know a couple guys that do this and that’s kind of their business – seller financing – and they have a good track record.” With seller financing, Jeremy explained, “a lot of times, [the sellers] don’t want to just put [their property] on the open market and just take anybody because they want a buyer they feel is going to be able to improve the asset, make payments, and refinance successfully.” In other words, since they will still own the property, they don’t trust an inexperience investor to control it. But in Jeremy’s situation, since the broker has already given him the credibility and social proof, the seller will likely be more comfortable awarding the deal to Jeremy over a random investor they don’t know in the open market.


Related: The 4 Keys to Building Relationships via Social Media

Seller Financing Lead Source #2 – The MLS


Obviously, Jeremy had to build up relationships over time before it was a reliable source of leads. So when he first started searching for seller financed leads, he used the MLS. “I have a broker that I work with who has set up an automatic [MLS] search that sends me an email with all the properties that meet [my] criteria,” explained Jeremy. At first, his criteria was all multifamily properties in his county where the seller was accepting seller financing.


However, for Jeremy’s first two deals, he followed a different strategy. Jeremy said, when discussing his first two deals, “it was multifamily properties that had been on the market for a little while. We figured maybe they’d do seller financing because they’re tired of having this thing listed.” Even if the listing doesn’t directly say “we accept seller financing,” that doesn’t completely eliminate the possibility, especially in situations where the property has been listed for a long time.


For the properties Jeremy purchased on the MLS, he said, “either it said on the MLS that they would take seller financing or it didn’t say that but they’d been on the market for a little while and it was a value add opportunity where they had a low enough mortgage balance that we could do seller financing and give them a down payment big enough to cover their existing debt.”


One of the reasons why properties with extended time on the market are great seller financing candidates is because the seller is asking above market value. So when Jeremy finds a listing that is 30 to 45 days or more, he’ll reach out and say “hey your asking more than the market is willing to bear right now, but we’ll get close to that if you can give us seller financing, so that we can leverage more on the property. Here’s our plan for value add and here’s our track record. We’ll get you cashed out in a year of 18 months.”


Like most investment strategies, this approach is a numbers game. “I’d say for every 10 that we ask,” Jeremy said, “maybe one says ‘maybe I’ll take seller financing.’ It’s not like we hit a lot, but if we can hit one or two a year, that’s a good growth rate for us.”


Related: Hassle Free Seller Financing Trick

Seller Financing Lead Source #3 – Property Won’t Qualify for a Bank Loan


For three of the properties Jeremy purchased using seller financing, the sellers didn’t have much of a choice but to accept seller financing because, for one reason or another, the property couldn’t qualify for a bank loan. These types of properties are the most ideal for the seller financing strategy.


For the 8-unit deal mentioned previously, Jeremy said, “it was an interesting one. The owners had completely paid it off. They were elderly, living in one of the units and only … one other unit was occupied. Six were empty because they just liked to have a quiet lifestyle. We got seller financing at a good price because we said ‘you can’t really finance it with a bank without showing income, so if you do seller financing with us for 18 months, we can get it healthy and then we will refinance.’ They really liked that.”


The owners of the first property Jeremy purchased with seller financing also couldn’t qualify for a bank loan. “The first one that we purchase had a buyer that was going to use a bank loan,” explained Jeremy. “The appraiser thought that the foundation needed work and that they wouldn’t loan on it until that work was done. It went back to active [on the MLS] and then I came in with the seller-financed offer. They thought ‘this is great because seller financing will go through and there’s no appraisal to block it. Then it’s these guys problem to fix the foundation and do their refinance next year.’”


Finally, Jeremy’s second seller-financed property was severely under-rented, relative to the market values, and wouldn’t qualify for a bank loan. Also, Jeremy said, “one of the units was empty and being used as just a laundry room. It was maybe earning less than half of what it could earn just by getting all the units functional and up to the market rent. If a buyer came in with a conventional offer, the bank would be seeing a very low income, so that’s why we said ‘well if you give us a year of seller financing, we will be able to refinance it the next year.’ They said yes.”




The best way to get leads for properties that are seller finance candidates is through word of mouth referrals and relationships. Since relationships take time to build and grow, the best place to start is on the MLS. A few properties on the MLS will state that the owner is willing to accept seller financing, but properties that have been listed for 30 days are also great candidates.


The type of properties that is likely to be seller finance candidates are properties that cannot qualify for bank loans. These are properties, for example, that has major maintenance issues, has high vacancy rates, or is severely under-rented.


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Hassle Free Seller-Financing Trick


In my conversation with Nate Tanner, who specializes in hassle free seller financing, he shared how he stumbled into his current business model by being resourceful during the 2007-08 real estate crash. He explains why his seller financing strategy is a great way to make the most money while doing the least amount of work.


When the market crashed back in 2007-08, Tanner was stuck between a rock and a VERY hard place. He controlled 6 properties that had hard money loans at 18% interest! Most people that were facing similar situations defaulted on their loans, and the banks took their properties back. However, Tanner says that he was too stubborn to do that and instead, he went into resourcefulness mode. As a result, he was able to find a strategy that would allow him to salvage the situation. He brought in 6 partners that could qualify for bank loans and sold each property to an individual partner. Then, he deeded the properties into an LLC that was a joint venture between him and the partner borrower. Finally, they sold the properties via seller financing so that they could sell them above the market value.


After successfully navigating his way out of this disastrous situation, he realize that if this strategy worked with properties that were way underwater, how great would it be if he bought properties the right way from the beginning, and then followed the same process? Therefore, out of a seemingly disastrous situation, an amazing, hassle free trick was born.


The main reason why Tanner likes this strategy is because it allows him to wring the most out of a real estate deal. For example, let’s say he finds a deal, runs the numbers, and determines the following:


  • Purchase Price: $70,000
  • Renovations Required: $30,000
  • All-in Cost: $100,000
  • After Repair Value: $140,000


At this point, Tanner has the option to follow 1 of 4 strategies, one of which being the hassle free seller financing strategy that is his current business model:


Strategy #1 – Wholesale

Tanner could quickly wholesale the deal for $75,000, making the spread, which is $5,000


Strategy #2 – Fix and Flip


Tanner could flip the property, having an all-in cost of $100,000 and sell for $140,000. After commission, closing costs, and carrying costs, he would make a profit of $25,000.


Strategy #3 – Wholetailing


Wholetailing is a cross between wholesaling and retail. Therefore, Tanner could clean property up, put it on the MLS, and walk away with a $15,000 profit.


Strategy #4 – Hassle Free Seller-Financing


The strategy that Tanner would actually follow would be the hassle free seller-financing model. He cleans the property up, to the same degree that he would if he were to have followed Strategy #3 – Wholetailing. However, instead of putting the property on the MLS, he sells it as a seller finance deal and explains that it needs work. Typically, the work required is minor, but he applies the same strategy to major fixer uppers as well.


Following the example, Tanner would put in $5,000 in renovations and sell it for $105,000. At that point, the big key is to bring in a private lender and borrow the $75,000 at 6% from them to get all of his money back ($70,000 purchase price + $5,000 renovation budget), and then sell it to a buyer with $10,000 as the down payment and at 8% interest.


After completing the sale, he has made the $10,000 upfront, and on top of that, he makes the monthly spread between the 6% interest paid to the private lender and the 8% interest he receives from the buyer, which over a 10-year period would come out to another $40,000


When comparing all 4 strategies, Tanner’s hassle free seller-financing model results in a $50,000 profit, which nets him twice as much as the flip, 10 times as much as the wholesale, and over three times as much as wholetailing.


If you don’t need a big chunk of cash right now, then Tanner’s hassle free seller-financing strategy is a great way to get the most money with doing the lease amount of work!



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