One of the biggest challenges of real estate investing is securing funding for new acquisitions. And, despite historically low interest rates, traditional mortgages may be more difficult for investors to qualify for as lenders tighten the requirements amid the 2020 recession.
But there are ways to finance an investment property without getting traditional lenders involved. One of the best ways to get around traditional lenders is with seller carry-back financing. Let’s take a look at how it works, why it’s beneficial, and how you can find properties with seller carry-back options.
What Is Seller Carry-Back Financing?
Seller carry-back financing is a sales option in which the property’s seller agrees to finance your purchase of the property (also called “carrying the note”). You may have seen “seller financing available” or “owner will carry (OWC)” on a real estate listing; this refers to seller carry-back financing.
Instead of making your mortgage payment to a traditional lender, you will pay principal and interest to the seller each month. If you default on the loan, the seller can reclaim ownership of the property through foreclosure in the same way a traditional lender would.
The Benefits of Seller Carry-Back Financing
The key benefit for buyers using seller carry-back financing is the ability to secure funding to purchase an investment property without using a traditional lender. This is particularly useful when you wouldn’t qualify for a traditional mortgage, perhaps due to credit issues or financial ratios.
But it’s also useful when you simply have too many properties to qualify for another mortgage at a reasonable interest rate. If, for example, you have a primary residence plus a vacation home and three rental units, the interest rate on a conventional loan for a sixth property would likely be excessive, and you may not want to consolidate your properties to a portfolio loan because the rate for the portfolio loan could exceed your current interest rates on each of your properties. So seller carry-back could give you a path to financing a property without unreasonably high interest.
Additionally, buyers benefit from seller carry-back financing through faster closings, flexible down payments and lower closing fees since the mortgage process is side-stepped on their side of the transaction.
How to Find Properties With Seller Carry-Back Options
Some listings will explicitly state “seller financing available” or “owner will carry” on the multiple listing service (MLS) listing. But it can be difficult to get access to your local MLS if you’re not a licensed real estate agent. In that case, you could take advantage of PropStream’s Property Finder Tool, which offers all the details you can find on the MLS, even if you don’t have a real estate license.
You could also contact homeowners to see if they’d be willing to accept your seller carry-back terms. PropStream offers tools to allow you to quickly and easily find property owner phone numbers and email addresses so you can contact more owners in less time. You can even view homeowner mortgage information to confirm that sellers own the home free and clear (to avoid potential problems with a mortgaged homeowner’s existing lender).
So when you’re unsure about how to fund your next investment property acquisition, consider seller carry-back financing. With seller carry-backs, you’ll be able to grow your portfolio and your income without dealing with the red tape of the mortgage industry.