How to approach a seller about seller financing
Chicago · Member since 2018 · 28 posts · 12 votes
Hey everyone,
I'm working my through a fairly familiar scenario, looking to jump into the brave world of multi-family REI without having the seemingly $100k+ in liquidity to start out with.
One strategy I'm considering is seller financing, for it's ability to side step traditional financing requirements and hurdles.
Does anyone have any experience with seller financing? And if so how/when did you bring it up? I have a feeling that there might be an art to not bring it up too quickly or too late into the negotiation.
Appreciate any help!
The best way to jump in without much money is going to be house hacking. You can owner-occupy a 2-4 unit property with a low down payment financing option like 3.5%.
In regards to the seller financing, here is a really good article that breaks it all down for you:
https://www.coachcarson.com/seller-financing-owner-financing-buy-real-estate/
@Dan Miklosz - While having your own money to begin in real estate is always nice, it's not required. There is definitely opportunity to find multifamily property purchasing it with owner financing. Even with owner financing, you will need money for a downpayment. So, that is where you may need to save up more of your own money or work on raising capital so you can bring an investor or partner in on the opportunity.
I would agree there is an art to knowing when to ask certain questions like if owner financing is an option. It's also important how you ask it. I find one of the best times to ask is after "why are you selling". It's easy to transition into - "do you own this property free and clear?", or "do you have a mortgage on the property?" If they get defensive there are ways to respond and defuse their defensiveness with the right language.
I would look for opportunities that are actually marketing seller financing - there are some in the MLS or with commercial agents. Lots of landlords understand the value of seller financing as a tax advantage and have terms in their mind if they carry financing. Some don't know about it as an option even though it's free and clear - which is why it's a great talking point or question to find out if it's an option.
Good luck - hope this helped!
The best way to jump in without much money is going to be house hacking. You can owner-occupy a 2-4 unit property with a low down payment financing option like 3.5%.
In regards to the seller financing, here is a really good article that breaks it all down for you:
https://www.coachcarson.com/seller-financing-owner-financing-buy-real-estate/
Thank you for your thoughtful response! I'm looking at a few different options for financing and appreciate the insight.
I recently bought a condo in downtown Chicago as my primary residence, as much as I'd love to house hack I'm not looking to move just yet. It's definitely something I'm going to consider for my next move.
Really appreciate that link, I'm enjoying the article.
Ok my first multi-unit was purchased with none of my own money. Was an 18 unit in Evanston Il. The building was approx. a mile straight south of Northwestern University. It was a distressed owner, not financially but was having problems with the city on other buildings he owned. Anyway I explained to him that I had most of the money from various sources. He asked how I was getting the money. I told him my father in law was lending me 25000, and the bank would give me 527000 if the property appraised out. I told him I could probably refi. my building but wasn't sure how much I could get. It was then when he said "If you give me 695000 I can take back a 2nd mortgage for 65000." Well with that I knew I could pull 85000 out of my building. So I came to closing with 527000,25000,85000 and his 65000. walked out with 40000 and change and after all expenses, a cash flow was 3300 a month. Now this deal is not typical or maybe it is. But I was just being honest and most people who own these kind of properties are wise to making a deal. Just ask if they'd be willing to hold some paper.
So, the idea of how and when to bring up seller-financing is fairly important. I've had experiences with both seller-financing and lease-options. Both of these strategies are not something you'd bring into every deal. One of the big steps you should undertake is a review of what kind of seller you are dealing with. Specifically, are they a sophisticated seller with the means to maintain the note that will result from the transaction? For instance, other real estate investors may be willing to do a seller-financed deal because they would view the benefits of the note is included in their investment portfolio. Moreover, they would have a basic understanding of how real estate financing functions. However, if you are dealing with a normal seller without any experience, you're going to be looking at an uphill battle because investing may not be something that has crossed their mind. Additionally, if investing is something they are interested in, it is likely not going to be in note investing or real estate because their likely method of investment is retirement/401k.
So, on one occasion, before I even considered seller financing as a viable option, I researched to see who the seller was via public records and whether they owned multiple properties. They did, and I gave them a brief phone call to see the unit (they were doing it FSBO). I viewed the unit and determined it would not likely pass appraisal inspection requirements. Then, I called the seller and informed them I was interested in the property but didn't think it would pass a basic inspection by an appraisal and would, therefore, require some work. At that point, I gauged his interest in an all-cash offer and the followed up with his interest in seller-financing. I made sure to point out that conventional financing would likely lead to a waste of time and additional work on his end, and he understood because he held many properties. He laid out his terms for seller financing versus an all-cash offer. During this point, I started asking for his other units to add to the deal and he gave a list of properties he would do seller financing on. I ended up going in a different direction.
That's one of my experiences - I've got a couple more similar ones where we arrived at agreed terms but I went a different direction (all were around the same time period). I think the most entertaining negotiation I've had was an investor looking for a regular sale of one of their rental properties and I ended up doing a round table negotiation with them to identify terms of the sale (my partner and I did this nice presentation with charts and graphs and stuff and they liked it a lot). I negotiated that one down in price and to a lease-option term, but it fell through because the basement was flooded on a second inspection. Again, the common denominator is that the seller was a real estate investor looking to offload their property.