Seller Financing – Why 20% Down???
Terms on Seller Financing
Recently I have been getting a lot of phone calls from people who want to make a “good deal” on by buying a home with seller financing. And why is it that you always see a seller looking for 20% down or even more.
I thought this may be a good time to express why most sellers are looking at 20% down, or even more, as their initial down payment on a home. It is best to be able to see things from another person’s perspective.
What is Seller Financing?
Typically seller financing (which is often called owner financing) is when the seller of a home is selling their home and is also willing to finance the buyer. Often there is a 20% down payment.
You can read more on seller financing by reading my article What is Seller Financing that I wrote on this subject.
I get it. You as the buyer want to get into a home with the lowest amount of money possible. If you could buy a home with no down payment you will be all for it. Those kinds of scenarios do exist but only if you are getting traditional financing and you are also getting some form of down payment assistance. They do exist in the traditional world, but not the creative financing world.
In this world, you need to understand a few things.
The creative financing world things work a lot different. This is the world of investors, not bankers. This world is all about cash flow, rates of return, and investment strategies. It is a world about investment strategies that will work for the investor and also for the person who is working to make a deal, namely YOU.
When you enter a deal with an investor you need to also be able to see it from the investor’s perspective. If you can understand that then you will have a much better chance of getting a deal accomplished.
Typical Scenario – Math Explained
Let me ask you one question. If you were to sell a home to someone else how much money do you want to put into your pocket to ensure they will be good for the loan? This is commonly known as “skin in the game”.
Let us assume the home is $200,000 for the sake of argument.
If you say maybe you want to pocket $20,000 (a.k.a., 10%) then you would be like the beginning investor. But, we will assume this is true to an investor.
But wait… You forgot something. Let us assume this home was listed on the MLS (Multiple Listing Service that real estate agents use). Let us also assume this is a traditional transaction.
Often you will see that commissions to the agents and brokerages are around 3% of the purchase price. Thus, this makes an additional 6% that the investor must payout. Typically the closing costs for a seller is around 2 – 3% of the purchase price to include title/attorney fees, transfer of title, and other associated costs. Thus, a seller will pay about 9% of the purchase price in fees and commissions.
If that seller was only asking for 10% down then he would net about 1% of the purchase price into his pocket!
Again, I am going to ask you the same question. You are selling your home at $200,000 through a Realtor and you will pocket maybe $2,000 at the closing table. Does that sound like a good deal? Of course not. Thus, if you want to add in your 10% to the already costs of 9% that would make 19% that the buyer must come to the table. Rounded off this means 20%.
Seller financing is a great option to get into a home without having to worry about banks. It does require available funds in order to do it. Expect 20% down as the normal operating procedure. It is one of the easiest ways to get into a home without worrying about credit or anything like that.
If you are looking forward to this type of deal you can check me out as this is one of my specialties.