How Does Creative Financing Work?

Today I got this email from Teresa, a real estate broker:


I have a buyer with a good down payment. They make good money, but they are self-employed, have less than perfect credit, and are having problems getting financing.

They have been looking to buy a home around the $300-400k range.  I would like to get you connected up with my buyer to see if they can use your creative financing techniques to make a purchase.

Let me know when you are available.

Sincerely, Teresa, Real Estate Broker


Dear Teresa,

I can probably help this buyer. I look forward to talking with you. It sounds like you have found the kind of buyer who can benefit from creative financing.

What is the advantage to a buyer to do seller-financing? The buyer can avoid the cost and trouble of getting bank financing.

What is the advantage to a seller to do seller-financing? The seller will have more potential buyers and can probably get a better price than if the seller insisted on the buyer getting a new loan.

As an agent, what you are looking for is a buyer who can pay at least 8.0% to 10.0% percent down. You need that much to cover closing costs and commissions and other costs. Commissions get paid at closing.

You are looking for a seller who has a property with equity in it. It should be obvious that seller financing is not going to work in a short sale situation. The seller should have at least 10.0% equity in the property.

If the seller has only 10.0% equity in the property, the seller’s equity will generally be cashed out. Then the buyer’s monthly payment will equal the seller’s mortgage payment.

If the seller has more than 10.0% equity in the property, either the buyer will make a larger down payment or the buyer will owe the seller his equity on a second note.

These seller-financed deals are all unique. They are structured in different ways. I believe I can put them together so that buyer and seller are secure and so the lender will not object to the transaction. I would describe exactly how I handle these deals, but the information is “proprietary”.

When I put these deals together I represent buyer or seller – not both. But I make sure that the party I am not representing gets legal counsel. As broker you need for this to happen for your protection. I generally represent the buyer, but I have also represented the seller. Bear in mind that seller-financing is not for everybody.

I just closed a deal like this in Pierce County. The buyer is a contractor who is going to live in the house and run his business out of it. He has bought and sold a lot of properties. Property values are down, and now is the time for those wanting a bargain price to be buying.

I believe that in many cases seller-financed transactions can be closed even when there is a due-on-sale clause in the seller’s mortgage. However, the buyer or seller needs to come see me for a consultation so I can disclose the pros and cons.

If you are a broker, don’t be shy about calling. I do not charge brokers for time on the phone.

I also handle mortgage modifications and bankruptcies, but it is structuring seller-financed deals that I find most interesting.

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