Seller Financing vs Hard Money
When a bank will not fund a deal, investors look for other routes. Two of the most common are seller financing and hard money. Both skip the traditional bank process. They work in very different ways.
This guide compares them. You will see how they differ on terms, speed, cost and risk, and when one makes more sense than the other.
What Seller Financing Means
In seller financing, the person selling the property acts as the lender. You make a down payment, sign a note and pay the seller over time. The seller holds a lien or a similar interest until you pay off the note or refinance.
Terms are whatever the two sides agree on. That includes the down payment, the payment schedule and the length of the note. Many seller notes end with a balloon payment, so you must refinance or sell before it comes due.
What Hard Money Means
Hard money comes from a professional lender. The loan is secured by the property, and the lender focuses on the deal. The program pages list terms, but they are offered only to qualified borrowers and subject to change.
The hard money page lists $75K to $5M, up to 60% LTV and 80% CLTV, and three to nine months of interest-only payments. Foreign nationals are eligible. The lender states it returns preliminary terms within 24 hours.
Flexibility Compared
Seller financing can be very flexible. A seller might accept a small down payment, a low payment at first or an odd schedule. There are no standard rules, so a motivated seller can shape the deal around your needs.
The flexibility is real, but it depends on one person. If the seller says no, there is no program to fall back on. Most sellers also want to be paid soon, because they need the cash for their own plans. Many properties have an existing mortgage with a due-on-sale clause, which can block a seller note altogether. Have an attorney check this before you proceed.
Hard money is more structured. The terms follow a program, so you know what to expect. You may have less room to negotiate, but you also do not rely on a seller's goodwill.
Speed and Certainty
Seller deals can close fast when both sides agree, because no lender needs to review the file. But the talks can drag if the seller is unsure. Paperwork must also be correct. A loose agreement can cause problems later.
Hard money has a clear clock. The site lists bridge closings in 10 to 21 days and rental loans in 22 to 35 days. The clocks start after the appraisal payment and borrower conditions are met, and appraiser access can slow things. For a buyer facing a firm deadline, bridge loans that compare well with seller notes on speed offer a more predictable path. The bridge program is listed at $100K to $5M, up to 75% of purchase and six to 18 months, with no rehab required.
Cost and Payment Terms
Seller notes can carry a high or low cost. Some sellers want a premium price in exchange for easy terms. Others are happy with a fair price and a steady income stream. You must read the whole offer, not just the monthly payment.
This article does not state hard money rates or fees because Kings of Capital prices each loan to the deal. It is fair to say a short-term lender charges for speed and risk. Ask for terms on your property and compare them with the seller's offer on total cost, not just the headline number.
Who Takes the Risk
With seller financing, the seller carries risk. If you stop paying, the seller must take action to recover the property. That may take time and legal cost. Because of that, many sellers ask for a larger down payment or a higher price. There is a good general summary of the basics of real estate investing for readers who want the wider picture.
With hard money, a professional lender has the risk. It looks hard at equity, reserves and your plan before it funds. That screening protects both sides. It also means you must present a deal with solid numbers. Credit is a factor, not the deciding one, but cash, equity and experience still matter.
Which Deals Suit Seller Financing
Seller financing fits when the seller owns the property free and clear and wants steady income. It also fits unusual properties, such as raw land or a building that needs unique handling. A tired landlord who wants to retire may prefer monthly payments to a lump sum.
It also helps when your own file is thin and a seller trusts you. The key is that the seller must really own enough equity to carry a note, and the note must be written well. A good real estate attorney is worth the fee.
Which Deals Suit Hard Money
Hard money fits flips, quick purchases and properties with a firm timeline. A flip needs money for both the purchase and the repairs. The fix and flip program page lists up to 100% of purchase and 100% of rehab, subject to a 75% loan-to-value cap, with nine to 18 months interest-only. See how fix and flip loans that replace a seller note with cash work if you are planning a renovation.
Rental buyers have a path too. The rental loans that let you refinance a seller note into cash page lists loans up to 80% LTV with 30-year fixed or ARM options. Hard money also fits when the seller will not carry paper. Most sellers do https://prospeo.io/c/kings-of-capital not. In that case, a lender is the practical choice. You can read more at hard money loans as a cash source when sellers decline to finance.
Combining the Two
Some deals use both. A hard money lender takes the first position, and the seller carries a smaller second note for part of the price. This can lower the cash you bring to closing. But the first lender must approve a second lien, and the combined loan-to-value must fit the program limits. Tell every party up front.
Questions to Ask Before You Sign
- Does the seller own the property free and clear?
- What happens at the end of the note or the loan term?
- Can I refinance in time, and what will it take?
- Who handles title, insurance and escrow?
- What is my total cost under each option?
Take your time on these. A cheap-looking deal can turn costly if the end date arrives before you can refinance.
Next Steps
If you are weighing a seller offer against a lender, bring both to a call. Book a call to compare seller financing and a lender offer and review the numbers with a lending expert. You can also contact the lender to compare a seller note with a loan by form, phone or email. For an overview, visit Kings of Capital and how to compare it with seller notes, where the 60-second survey asks for no documents, no fees and no hard credit pull.
No one can promise approval. All program terms mentioned are offered only to qualified borrowers and subject to change. Ask your CPA or attorney about the tax and legal side of any seller note.