Some listings just sit. The house needs work and won't pass a bank appraisal. The buyer is self-employed and can't get a mortgage. Rates scared off the buyer pool. Seller financing can get those deals done.
The usual worry from sellers is, "But I need my money." There's a way around that too. Here's how it works, from a note buyer's side.
Short version: With seller financing, the seller acts as the bank. The buyer puts money down and pays the seller monthly. If the seller needs cash, a note buyer can often buy the note at closing or soon after. Your commission is paid at closing either way.
When seller financing makes sense
- The house won't qualify for a bank loan. Condition issues, unusual property, or no comps.
- The buyer can't get a mortgage, but has a real down payment and steady income.
- The seller owns it free and clear, or owes very little.
- The seller wants monthly income and a higher total price.
- The listing has gone stale and the seller is open to options.
How your commission gets paid
The commission is usually paid at closing out of the down payment. If the down payment won't cover it, the seller can pay the rest at closing, or the note can be sold at closing to cover it. Work this out before you go under contract.
How the seller can still get cash
This is the part many agents don't know.
Option 1: Sell the whole note at closing. A note buyer reviews the deal before closing. They agree to buy the note the day it's created. The seller gets the down payment plus the note buyer's price at the same closing.
Option 2: Sell part of the note. A note buyer buys the first few years of payments. The seller gets cash now, and the rest of the payments come back later. Read partial note sales explained.
Option 3: Sell the note later. The seller collects payments for a year or so, then sells. A note with a year of on-time payments brings a better price than a brand-new one.
What the seller gives up: a note sold at closing brings less than the balance. A note buyer pays today for payments that come in over years. Read why a note is worth less than the balance. The seller should compare the net cash to what a price cut would cost them.
Set it up so a buyer will want the note
If there's any chance the seller will sell the note, set up the deal to a note buyer's standards from the start:
- A real down payment, at least 10% and better at 20%
- A licensed RMLO to check the buyer's credit and income and set up the loan
- A fair interest rate and payments that pay down the loan
- A recorded mortgage or deed of trust, drafted by an attorney or title company
- A licensed loan servicer from day one
- Title insurance for the seller as lender
The full checklist is in how to set up a seller-financed note that's easy to sell later.
Bring the note buyer in early
If the seller wants cash at closing, call the note buyer before you write the offer. They can tell you the terms they need: the down payment, rate, and length. Then the offer can be written so the note sells the day you close.
Stay in your lane
Realtors help with the sale, not the loan. Bring in a licensed residential mortgage loan originator (RMLO) to set up the loan, and a real estate attorney to draft and close it. Many RMLOs work with private sellers for a flat fee. Federal and state rules on seller financing are real, and they protect everyone.
I'm not a lawyer either. I can tell you what a note buyer needs, and the attorney makes sure it's done right.
Send me your sellers
If you have a client holding a note, or a listing where seller financing could work, send them my way. I'll take good care of them, and I'll tell you when I've reached out. There's no cost to you or your client for the referral.
Frequently asked questions
Can a note be sold at closing?
Often, yes. The note buyer reviews the deal before closing and buys the note the day it's created. Bring them in before you write the offer.
How does the realtor get paid with seller financing?
Usually at closing from the down payment. If that's not enough, the seller covers the rest, or a note sale at closing can.
Does seller financing need an attorney or an RMLO?
It should have both. An RMLO checks the buyer and sets up the loan to federal and state rules. An attorney or title company drafts the documents and closes.
What down payment should a seller ask for?
At least 10%. 20% or more makes the note safer and worth more if the seller sells it.
What if the seller wants to sell the note a year from now?
That works. A year of on-time payments usually raises the price. Set it up with a servicer so the history is easy to prove.
Have a seller who needs a number? Get a free quote or call me at 513-301-1468.
Larry has invested in real estate since 2006 and has bought more than 300 mortgage notes. He runs LJH Investments, LLC, an Ohio company based in Madison, Indiana. More about Larry
This article is general information, not legal or tax advice. Laws change. Talk with your own attorney and tax adviser about your situation.