20-year-old real estate investors who started with less than $1,000 in savings and couldn't qualify for a traditional loan explain the strategy they used to buy property without the bank's help (2024)

• When Caleb Hommel and Chuck Sotelo decided to invest in real estate, they didn't have any savings.
• They didn't qualify for a traditional bank loan, so they had to get creative.
• Seller financing allowed them to buy their first property without going through the bank.

When Caleb Hommel and Chuck Sotelo were looking for their first property to invest in, they had three stipulations: they wanted a multi-family property, they wanted to inherit tenants, and the seller had to be open to seller financing.

The third requirement was the most important, since they wouldn't be able to buy a property without it.

Hommel and Sotelo, who met on the first day of high school, were teenagers when they decided they wanted to invest in real estate. They didn't have any savings — except a couple hundred dollars each — nor did they even know what their credit scores were. They were still in junior college at the time and delivering food to pay for an online real estate mentorship program.

Seller financing was necessary considering their age and financial standing, Sotelo told Insider: "We worked for DoorDash and made like 400 bucks a month. Nobody's going to give us a bank loan."

Hommel added: "Turns out banks don't like lending to people like that."

What is seller financing?

With seller financing, rather than using a traditional mortgage originator such as a bank, credit union, or government agency, the buyer buys directly from the seller. The seller acts as the lender and provides a loan with agreed upon terms about things like the interest rate and schedule of payments.

There are various advantages that come with seller financing for both parties.

For Hommel and Sotelo, "the biggest thing is that there are no pre-qualifications necessary," explained Hommel. "The banks are crazy with all the underwriting they do. They screen the crap out of you. With seller financing, there are no pre-qualifications since it's a completely private loan. All the terms are customizable."

For example, with the first property they bought, one of the stipulations they negotiated in the seller financing terms was that they wouldn't have to make their first payment until six months in. That allowed them to profit a significant amount immediately, which helped them build up a cash reserve.

Another benefit of working directly with the seller and cutting out the bank is that the process is typically cheaper. You avoid expenses like closing costs and origination fees, which can add up.

As for the seller, they're getting a steady flow of passive income with each monthly payment, which can be especially beneficial to sellers living on a fixed-income or who don't necessarily need nor want a big one-time lump sum from a property sale.

It's an effective way for the seller to generate truly passive income. They're no longer responsible for managing the property or tenants, which can be time-consuming responsibilities that come with traditional real estate investing.

'Ask the right questions,' and other tips

The one big caveat with seller financing is the "due on sale" clause, explained real estate consultant and investor Dana Bull.

"When you take out a mortgage, there is a clause in that promissory note that is called the 'due on sale' clause," she told Insider. "What that means is, the bank can require the borrower to pay the remaining balance of the loan if there is a change in title."

That means, if the mortgage company sees that there is a new owner, it will consider the home sold and can demand payment of the remaining debt in full.

​​Part of the reason seller financing isn't super common is because most people don't own their properties completely, she said.

It can be tricky to find someone willing and able to do seller financing, which is a challenge Hommel and Sotelo ran into, especially in the beginning when they didn't have as much confidence when talking to property owners.

"Once we learned how to talk to people and ask the right questions, then it got a lot easier," said Hommel. "We stopped going around telling everybody we were 18 years old and people started perceiving us as experienced investors."

Still, it took about six months and over 500 phone calls to land their first deal, added Hommel: "It was a lot of negotiating and finding out what was most important to the seller."

The terms they settled on with the seller included a 10% down payment, which they afforded by raising capital, a 4% fixed interest rate, and a five-year balloon. (With a balloon payment, you start by making monthly payments, then pay the rest in one lump sum. They plan on refinancing down the line, rather than making the lump sum payment.)

Hommel and Sotelo, now 20-years-old, used seller financing for their next two deals and afforded the down payments by raising capital from different investors. They now own 28 units across three properties in Texas, which Insider verified by looking at their closing documents.

They plan to continue investing in properties using other people's money and seller financing.

​​Finding property owners willing to do this type of financing requires a lot of networking and cold-calling, they said.

Bull also offered advice to investors looking to go this route. When you're actually looking at properties, "you can usually figure out what somebody owes on a mortgage or you can see if they've refinanced in the past," she said. "That's information that is available through public record." You can look for places that are completely paid off or close to being paid off, "but the main thing is just asking the seller," she noted.

It may take more legwork than going through a traditional mortgage lender, but it's a strategy that any rookie real-estate investor can use to buy their first property — no matter where you're starting from, said Sotelo: "We had no experience in real estate. We didn't have any credit, we didn't have any money, and we didn't really have any connections before we started networking during junior college. We literally started at ground zero."