10 Reasons to Buy A Duplex Using Seller Financing

Almost every real estate book, podcast or guru I’ve ever read or listened to has said seller financing, also known as a contract for deed or land contract is a great way to acquire real estate.

For almost a decade, a contract for deed has been hard to find. Many sellers have received much higher rent than the post-tax proceeds they would have received after a sale in a down real estate market, so they have stayed invested in their properties.

Thanks to a decade or more of low mortgage interest rates, many buyers have wondered why on earth they would ever use seller financing either at a higher than current market interest rate from the seller or, face the prospect of higher interest rates when it comes time to refinance and take the Seller out of the picture with a balloon payment.

Yes, sellers willing to accept a contract for deed are still a needle in a haystack. Having said that, however, I have run into two of them in the last three months!

So here are reasons why buying a property on a contract for deed is a great idea, no matter what current interest rates are:

1. Lower down payment – Many duplex buyers are limited to either FHA loans, with their owner occupancy and mortgage insurance requirements, or to a 20 or 25 percent down payment for investors. Many investment property sellers will take less of a down payment in order to minimize the capital gains and depreciation recapture taxes they owe in a given year, or even spread the down payment out over time as a tax strategy.
2. No mortgage insurance – If you’re an owner-occupant using FHA financing, you may be required to have mortgage insurance to cover the lender in the event you default on your payments. This often results in monthly payments that make a duplex cost-prohibitive to own. A contract for deed may have an equally low down payment, and no mortgage insurance, resulting in higher cash flow.
3. No FHA appraisal restrictions – Many sellers are reluctant to accept FHA financing because they falsely believe they will be required by FHA to fully remodel the property to have it conform to FHA insurance requirements. Buyers can assume all repairs an FHA lender may not allow, thereby easing the seller’s concerns.
4. Terms of the contract are all negotiable- Want the payments to be amortized over 40 instead of 30 years so you have higher cash flow while you fix it up? If the seller agrees to it, you can. Want to pay interest only while you remodel? If the seller agrees to it, you can. In fact, any terms you and the seller agree to are ok. A contract, after all, is simply an agreement between two parties.
5. Doesn’t show up on your credit – If your debt to income ratio is high, or you don’t want it to be due to having too many loans, the good news about a contract for deed is it won’t show up on your credit, and therefore, won’t count either for or against you.
6. No restriction in the number of contract for deeds you can have at any one time. In other words, if you already own too many properties, you won’t be required to get a commercial loan with their shorter amortization schedules (and reduced cash flow).
7. No appraisal. You can buy the property for more or less than it’s worth (yes, there may be certain strategies where it makes sense to overpay for a property).  Why pay $400-600 if you don’t have to?
8. Minimal closing costs – With no loan origination fee, reserves for insurance and other prepaid expenses, closing costs on a contract for deed are usually well below $1500.
9. Appreciation – If the property increases in value due to the market going up, increasing rents to market rent, or the overall value rising as a result of capital improvements, you may be able to refinance when the balloon payment is due with no additional out of money contributed toward the down payment.
10. More seller opportunities – Most investment property owners I meet who are interested in selling on a contract for deed have more than one property. If you make your payments promptly and are a good steward of the property, the seller may decide you are a good buyer for other properties he or she owns. This gives you a leg up on any competition, and a chance to increase cash flow exponentially.

While there are some risks buying property this way like a mortgage due on sale clause, and the seller’s ability to foreclosure quickly if you miss two payments, the benefits far outweigh the risks.

If you’re lucky enough to find the rare seller who’s willing to help finance your wealth-building, it may be an opportunity too good to pass up!