Seller Financing: How it Works

Uncategorized Sep 30, 2017


Here is a discussion of seller financing for income properties (not single family homes)-- financing properties without banks.

I call my income properties "Colonies" and I'm very specific on the type that I'm looking at. A colony for me is five or more units on a single parcel. These units could be single family houses, duplexes, converted garages, legal non-conforming-type buildings.  The reason I like those properties is, they're going to be purchased in a sort of run-down condition and with five or more units, you can't get a traditional loan at a bank.  You have to get a commercial loan and they will not loan you money for a commercial loan on this type of “worn” property. Therefore, the sellers usually know that they have to carry the seller financing. I'm going to give you some reasons here why this is my very favorite type of financing and why it is so beneficial. THIS IS A CALL TO ACTION, PDF

In this short presentation, we're going to cover the best source of financing available…. FROM THE SELLER.

Remember we are not talking about single family homes that you can easily get a bank loan. We are talking about slightly unusual properties, colonies, five or more units on a single parcel.

Now, we'll go over:

·              Why the sellers have to carry back the financing

·              Negotiating with the sellers

·              We'll give you a few special tips to use

·              Some techniques

           Some more benefits of seller financing 

85% of my Colony deals have seller financing.  This figure surprises a lot of people because they think that getting seller financing is unusual. Many agents will say that that's not available any more; “it used to be available in the 1980’s but not today”. That is not true.

 In most of my properties that I bought over the last several years, this type of group of houses, the colonies -- 85-90% have been from seller financing. Keep in mind also, when I sell my properties, I want to give seller financing to the new buyer. It's beneficial to me, and you will see some of the benefits here shortly.

           Why seller financing? Contrary to what you hear:

          it is always available

·              It's almost always cheaper than going to a traditional bank.

·              It's always more flexible than a bank, because the banks have lots of regulations and terms and charters.

·              Sellers give the best terms, and the best terms are what you negotiate with the seller, not the product that the bank has to sell you.

·              An excellent buy-back opportunity.

I will only touch base on this buy back opportunity for a minute here, but it's a gold mine. A buy-back opportunity is this: Let's say you get seller financing on a property that you bought a couple years ago. You've been making monthly payments on time.  You then go to the person you make the payments to and you say – “hello Joe or Jane. I just came into a little bit of money and I want to know if I can buy back your loan – (let's say it's a $50,000 loan) -- I'd like to buy back your $50,000 loan for $30,000 cash this week.

Wow, now you say -- well, why would anybody sell a $50,000 note for $30,000? A $20,000 discount.

Think about it. Maybe you had one or two kids going to college, or about ready to go to college and you're a little bit low on cash.  Those monthly payments that you're getting on the mortgage aren't as beneficial to you as a chunk of cash. Or you might be going through a divorce or retiring. There's lots of reasons why you may take back this kind of note. When you do it with a seller, it's very profitable. Just keep that in mind as an extra bonus of seller financing.

Seller financing almost always requires you to have a one-on-one sit-down with the sellers.

They want to know who you are, and why they ought to be talking to you.

Keep in mind that real estate agents work hard against this happening. They really don't want you as the buyer to be sitting down with the seller and mess up their deal. Understandable, but you know what you're talking about and you want to know what makes that seller tick.  It's your job to explain to the agent that you'll only sit down with them for X amount of time, find out what you need to do, then leave the room, and give it back to the agent.  Hugely beneficial.

A couple things to realize when you're negotiating with sellers.

Recognize that there's people and their desires that are at stake. Yes, of course, the subject here is the property. That's what we're talking about. But the discussions that you're talking about in working on the seller financing…that becomes very personal. You are trying to find out what makes that seller tick, what that seller needs, and what you need to do to put together a deal.

Here's an example situation probably pretty typical.

You have an older seller who wants to sell this type of property. Remember we're not talking about single family houses or a duplex. Typically five or more houses on a single property, and they're going to be a little bit run down. If they're already fixed up, we don't really want them, because we can't create benefits. So when we're talking about this seller, he's got five or more units, and they're either run down a little bit or mismanaged. He wants $100,000 for the sale, and he plans to put that money in the bank and draw $750 a month to support his retirement income. Pretty simple.

When you're sitting down with the seller, you say something to the effect of -- Mr Seller, let me understand what you're trying to do -- and I'll read this as if I were speaking to that seller -- you plan to put $100,000 in the bank and draw out $750 each month to supplement your retirement. Do you know how long your payments will last?

Most sellers don't know that, so I tell them, and I've written that here as 12 years.

Then I say -- Mr Seller, if you'll finance that $100,000 with me, I'll pay you $750 a month, including whatever the interest rate is, I'll say 7.5% interest here -- do you know how long that will last?

I will tell them 26 years.

Which do you like the best? The way you plan to do it, and your money's going to last you 17 years, and the way I do it, it's going to last you 26 years.

A lot of times sellers may want to do business with you, but they aren't sure quite that they want to do business with you where they don't know enough about you. In this situation, I will share my financial documents with the seller. Typically I will do this at an escrow office. They can go into a room, look at all the documents I give them; they leave the room; they give me back the documents. I do not give them the documents to take home.

I will show them a profit and loss statement of my rental business, what my rents are, expenses, etc. I will give them a schedule of the real estate I own, and the mortgages I pay on those properties I own, with addresses, amounts, and the phone numbers of people that I own, and they're welcome to call those people. Now they can thoroughly check me out to determine if I'm a good risk. 

Once again, if they're still not satisfied, I still have another thing that I can offer them, and that is additional collateral. This is a simple concept. I say -- everything else looks OK, but your not sure about taking back the financing just on the collateral of this property that you are selling, and I say -- I have an extra house or a duplex or a triplex over here, and I will put that up as additional collateral on the property that we are buying right now. 

What I do is I put that as collateral towards the loan on this property that we're trying to buy, but I say to him -- I will put that on there as additional collateral for, let's say, four or five years, and after I make monthly payments on time for those four or five years, that additional collateral on that extra property just disappears and we go back to just making the payments, but there's no additional collateral.

Very powerful when you use these with the seller.

One of the things that you will really notice when you do a deal is -- benefits are usually more important than the money. Everybody says "I need the money," but think about it. Speed and timing -- how fast you can close is a very powerful tool.

Let's say they're selling a property that has wild tenants from hell. You can imagine, tenants... Monkeys are running the zoo; the tenants are running the property; you have minimal control and you're not a manager; you have headaches; they're not paying you; they're trashing your properties. Yes, money is good, but if you could take that off my hands very quickly, you've got something good.

Let's say they are selling or going to the hospital or a long term care facility, divorce, maybe in jail -- learn the hot buttons. These are very important, and most of the time, it's not always the money.

One of the best negotiating tools I can tell you about in negotiating with a seller is what I call an income property analysis form. It's a common tool and you fill this out and you... These are the figures and the expenses and the income that you put on this form from the seller and you can both sit down and reveal it. You can't really make offers without the proper information.

We won't go into a lot of detail on this form, but let me show you what you can get. I'll give you the link in a minute, but you must have this online calculator. It's a free online calculator. You type in the rents and the expenses, and the calculator then shows you how much you can pay for your new seller financed mortgage. You'll put in rents, expenses, the amount that you pay for current mortgages that are already on the property that you are buying, and the calculator will automatically come out with a bottom line figure of the amount of money that is left over from that property, after automatically deducting a certain percent for maintenance, a certain percent for expenses, a certain percent for vacancies, etc. The calculator will do that, and it's really an absolute must, and carry this calculator with you everywhere. One of the benefits of this calculator is not only looking at the property that you are trying to buy, but on other properties that you're trying to buy, it will help you quickly determine properties that you should not be looking at, in other words, properties that aren't going to make money in a short period of time. It saves you a tremendous amount of time. 

For your free INCOME PROPERTY ANALYSIS FORM CALCULATOR CLICK BELOW.  It'll definitely help you when you're working with a seller, trying to get seller financing.

As explained here, seller financing is much more beneficial than bank financing, so,  so much more beneficial!

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