Take Advantage of Seller Financing and Seller Loans

Seller financing, in which the seller makes a loan to the buyer to help close the sale, is very common for real estate investors.

Typically, the seller takes back a second mortgage on the property after the bank's first mortgage in order to help the buyer finance the purchase with less cash. The buyer of a home can normally obtain a loan for 90 percent of the assessed value of the home (thereby achieving a 90 percent loan-to-value ratio), and the buyer of an investment property can expect to borrow 80 percent of the purchase price an 80 percent loan-to-value ratio. The remaining 20 or 10 percent can usually be made up from a seller-financed second mortgage, but sometimes the Sender requires more cash from a buyer.


In addition to the traditional type of seller financing, in which the seller takes back a second mortgage, it is also possible to get the seller to subordinate a small loan that is financed to a second mortgage from another lender. (Subordinating simply means putting the loan "in line" behind another loan. A first mortgage has first call on the asset; a second mortgage has second call, and is subordinated to the first.) Here's how this typically works: you (the buyer) obtain a new first mortgage for 80 percent of the value of the property. At the same time, you get a line-of-credit second mortgage for 10 percent of the financing from a conventional lender. This arrangement makes the seller's financing, in effect, a third mortgage, subordinated to both the first and second mortgages.

Since the seller is confident of the value of the property (having just established it by means of the sale to you), the third mortgage is probably not seen as a big risk. If the seller doesn't need all the cash from the sale to buy another property, it can also be a good investment.

This leaves you, as the buyer, with 100 percent financing, which at today's historically low lending rates is a great way to tie up property, even in a hot market. True, you will probably have a native cash flow from the property because you are carrying so much debt on it. In such a case, you're betting that the property's appreciation will more than cover your negative cash flow and that you can afford that negative cash flow until you have the cash to pay down the debt or you can find another investor willing to share the equity with you in return for covering the negative cash flow.

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