What is Seller Financing or a Wrap Loan?
Seller financing, also known as owner financing, is an alternative way to purchase real estate where the seller acts like a bank. Instead of going through a traditional mortgage lender, the buyer makes repayments directly to the seller, with interest, over a set term. This can be attractive to both parties, offering buyers more flexibility and sellers potentially higher returns. However, it’s important to tread carefully, as sellers become responsible for ensuring the buyer repays the loan and may need legal help to structure the agreement securely. There are three simple components that are worked on in a seller financing deal:
- Interest Rate
- Repayment Schedule
- Consequences of Default
Interest Rate
For the interest payment this is generally pretty well understood by most sellers as they often have had a loan on a house and know their interest rate.
Repayment Schedule
Repayment schedules can vary a good bit. Many sellers are aware of 15 year loans vs 30 year loans but another option that can help sellers reach their financial objectives is introducing balloon payments as an option. Balloon loan payments break down payments over a longer term as if they were going to be repaid over 30 years but then after a set period of time (ie. 5-10 years) the entire remaining balance becomes due. This is a good option for sellers that want the benefits of interest income on top of their sale price but don’t want to wait 30 years to get all of their money back.
Consequences of Default
What happens if the buyer defaults on their payments in a seller finance transaction? In Texas you want to make sure you have a Deed of Trust established when the transaction is completed. This Deed of Trust will give you the authority to initiate the foreclosure process. If the buyer does not pay up in time then the house will foreclose in as little as 42 days! Foreclosures are pretty painless in Texas and take very little time.
What is a Wrap Around Mortgage?
A wraparound mortgage is a unique type of seller financing that “wraps around” the seller’s existing mortgage. Here’s how it works: imagine a seller owes $100,000 on their house and wants to sell it to a buyer for $150,000. The buyer might not qualify for a traditional mortgage, so they agree to a wraparound. The buyer makes a monthly payment to the seller that covers the seller’s original $100,000 mortgage payment PLUS interest on the additional $50,000 they’re borrowing from the seller. The seller then forwards the original mortgage payment to their lender and keeps the extra amount as profit. It’s a win-win if done right, and we recommend that you use a third party mortgage servicing company in these transactions to make sure everything is handled correctly.
What Are the Benefits of Seller Finance for the Seller?
There are a number of benefits for the seller in a seller finance transaction because unlike a traditional mortgage transaction the seller now benefits from all of the benefits a bank would normally benefit plus a bit more.
- Purchase Price + Interest income= More cash in pocket
- Downpayment from buyer gives you immediate cash and secures they are vested in the deal
- Tax Benefits: You may be entitled to some tax benefits. Consult your tax advisor!
- Fast Sale: No need for delayed bank paperwork approvals etc.
- Passive Income: Unlike rentals there is ZERO maintenance and tenant management in seller finance. It is truly a passive investment
- Negotiate: You now have more levers to negotiate than just price and you can give a seller something they want like lower interest rate in exchange for a higher price!
Seller Financing whether direct from seller or with a wrap mortgage can be a win-win scenario. If you have questions on how these deals are done in Texas please give us a shout! Fill out a form on this page or call us to get in touch.