Buying Real Estate Without a Bank Loan, Try Seller Financing

It is possible to buy real estate without having to get a bank loan. It might soon even be easier to purchase this way as consumer credit scores drop and bank requirements to qualify increase. The biggest hurdle in today's market is the excess financing encumbering most properties due the drastic drop in housing prices. There are a few ways to find a seller willing to take on the additional risk of financing the transactions but the top method is prospecting and then asking. There are no real secrets on how to find seller willing to finance a sale so it just becomes a numbers game. If you talk to enough sellers you will find one that wants to sell bad enough that they will consider holding the paper.

Often sellers don't mind selling on installments because it gives them income and they can spread out their tax liability over a number of years. If they sell out right they will take the full take hit in that year. This may or may not be incentive for a particular seller but there a few reasons that people will consider structuring a deal this way.

Another hurdle when it comes to seller financing was put into most bank mortgages as a clause that says the property can not be sold on installments as long as there is a bank loan that is secured by the property. This used to be referred to as a wrap around mortgage where the seller would receive payments from the buyer. The seller would still be responsible for paying the original mortgage.

Banks frowned on this for a few reasons and decided to make it illegal according to the terms of the mortgage. It technically isn't breaking the law but it is violating the agreement with bank and the banks put in a due on sale clause that says if you sell the property in any manner, the original loan automatically accelerates and becomes due in full immediately. Yes I know, so much for a free market system, but the banks are in control of the money and as long as they don't charge excessive rates of interest they can put all types of things in a mortgage that will swing just about any situation in their favor.

To get around this clause, you will have to purchase a property as a rent to own or lease with option to buy. If the "sale" is set up as a lease with option to buy the due on sale clause will not be triggered. The mortgage will not be due on sale because the property has not been sold. If you go this route it is important to get the seller to agree, in the contract, that you will be able to see receipts for each monthly payment made on the original loan. If you don't have this clause you might end up having the seller get behind on payments and it would be up to you to catch up to avoid repossession.

If you can find a seller that owns their property free and clear with all first and second mortgages paid off, they can sell you the property without worrying about a due on sale clause. Most of the time you will have to deal with the lease with option issue but on occasion you might find someone that owns their property outright.

If you try this method of buying real estate you could end up with extra income from a rental or you might even find the perfect house for you. I tend to see this as a way to find property that can be used as a rental for a few different reasons.

Looking for income property gives you more flexibility with your search criteria. It is not that I see a rental property any less valuable because I know any rental I have ever had was someone’s home. I do not look down on a rental or make the consideration that it is “just a rental” when to repairs or improvements. It is good to remember that all rentals are a home to the tenants. It might not be your home but it is someone’s home. If you give your tenants and your property that bit of respect you will have the mindset that will set you apart from most landlords.

However, if you are buying a rental property you can look for property that might not be the perfect fit for you and your family. Your pool of what can make you money is a lot bigger than the pool that would meet would meet the criteria for your family residence. You can look for one bedroom, two bedrooms, one bath, two baths, three baths and four baths in all different shapes and sizes. Any combination of bedrooms and bathrooms are acceptable. However, if you are going to have a 3 bedroom home it would be important to have at least two bathrooms. The amount of people that can live in a 3 bedroom home will be way more than one bathroom can accommodate.

Whether the property can be make money or not depends on the price, property condition, and potential rent. If the prices are going to lead to monthly payments that are more than the monthly rent you may get then you don’t want to buy it. There really is no other way to put it. You are buying a rental property for income purposes. The purpose being to increase your income, not decrease it. You can make some real quick calculations once you know the price or payment amount the seller is requesting. If the rent won’t cover the payment with a lot to spare, there is point in working out all the other details by calculating all the other expenses and potential costs. If you are breaking even before you consider the taxes, insurance, trash, maintenance and any repairs needed before it would be suitable for tenants then the numbers are telling you to walk away.

.