Seller Financing – It’s Real!

When you are new to real estate, and without much starting capital, seller financing is the strategy that gives you hope. With seller financing, you don’t need a bank. You don’t need a hefty down payment. You don’t even need good credit.

I was sure that seller financing was a strategy of fairy tales.

As it turns out though, obtaining seller financing is completely possible. I bought a property with seller financing within 6 months of purchasing my first property. Regular banks would not have financed another mortgage for me that quickly, and I didn’t have 20% of the purchase price saved for a down payment. So, attention newbies and veterans alike, seller financing exists and it’s in your best interest to find it!

So, how did I find a seller willing to finance?

1. I looked for real motivation. This property was days away from being sold at a tax sale for several years of past due taxes. If the owner hadn’t have sold her property, she would have lost it completely and gained nothing. I did her a service by jumping in with an offer at the last minute. Seller financing allowed us to close in just a few days.
2. I asked. It’s as simple as that. You never know if someone is willing to carry the note if you don’t ask. In my case, I let her know that the only way this would go through is if she would be willing to seller finance the property. She listened and agreed.
3. I told her she could foreclose on me if I failed to make payments. That’s right. If I stop making payments, she can take back full ownership of the property—including all of the hard work that I’ve put in and wonderful tenants I’ve put in place. This made her feel a bit more comfortable.
4. I promised that she wouldn’t have to pay a dime in closing costs or legal fees to transfer ownership. She wouldn’t be financially hurt by agreeing to seller finance.

So, here I have an owner who is willing to seller finance. That doesn’t mean that we agreed on the details. This particular owner was quite stubborn about the dollar figure that she wanted to gain from selling this property. Now, many investors would like to interject at this point and say that she has no bargaining power given her situation. Quite frankly, I was outside of experienced territory and I’ve never been the kind of person to feel as if I was taking advantage of someone. So, I heard her out. There was no way that the property was worth what she wanted, but I listened anyway.

It’s important to remember that this is a people business. We are dealing with real people who are experiencing real problems—and who deserve the respect to at least hear them out. If I had low-balled her, she would have walked right out of the door. It was obvious, given the tardiness of her actions, that there was a part of her that was unconcerned with losing the property at tax sale. I listened.

Then, I told her exactly where I needed to be for this property to make sense for me. That’s right; I put all of my cards on the table. With seller financing, the silver lining is in the terms—because everything is negotiable. Here are the steps of our negotiation process.

1. I told her that the back taxes owed would absolutely need to be deducted from her asking price—since that would need to be paid immediately. I also explained that the private loan I would need to get to pay these taxes would have a high interest rate. This allowed me to shave off a bit more from the asking price. After all, it wasn’t my fault she didn’t pay her taxes!
2. Remember how I promised that she wouldn’t pay anything out of pocket for closing costs? Well, I had an estimate of what that would cost me, and dollars add up! I showed her this estimate and explained that this dollar amount should also be deducted from her asking price. She agreed.
3. I explained the extent of repairs, and what it would cost me. At this point however, she was adamant about sticking to our new—already declining—asking price. She became flustered and kept saying the property is being sold “as is.” OK OK, calm down. Let’s switch gears.
4. I explained that it wouldn’t make sense for me to purchase a property at the after repair value while ¾ of the property was vacant. It would inhibit my ability to perform renovations. Would she be willing to allow me to start my payments 6 months from our closing date? Yes, in fact, she would. I purchased the property on December 31, and I won’t start making payments until July 1.
5. Next, I showed her the numbers. I listed the taxes, property insurance, private loan payments, utility expenses and any other expense that I could think of associated with the property. I also told her that I needed to make $200 in profit per unit for this deal to be worth my time. We looked at the numbers and could easily tell how much of a payment I could afford to give her every month. From there we manipulated the length of the loan and interest rate until that monthly payment landed where it needed to be. We shook hands and met at the closing table two days later.

In this case, I bought a quadplex with $0 out of pocket. I gained a 20 year loan with an incredibly low interest rate, and I have time to renovate and rent out the units before I start making payments. Each seller financing deal will be different, I’m sure. Maybe the next seller will be adamant about the length of the loan, the down payment, or even the monthly dollar amount. The beauty of seller financing is that It doesn’t matter. Every inch of the terms are negotiable and you’re the boss.

Go out there and get it.