Seller financing- how to make deals work
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Folks,
This is a way I can sell properties, for a premium, that may not qualify for a conventional mortgage. I have bought several properties very cheaply, that were not what I wanted to fix up. I just sell them owner finance, get a great chunk down and above market rate interest and let them get started. If you can, I would recommend getting other financing and offer what you think they are worth.
I am not saying you cannot get good deals on owner finance, I have myself. But I have unloaded some dogs, that I did not want, that I still made a great profit on. Still getting payments on some.
This is a way I can sell properties, for a premium, that may not qualify for a conventional mortgage. I have bought several properties very cheaply, that were not what I wanted to fix up. I just sell them owner finance, get a great chunk down and above market rate interest and let them get started. If you can, I would recommend getting other financing and offer what you think they are worth.
I am not saying you cannot get good deals on owner finance, I have myself. But I have unloaded some dogs, that I did not want, that I still made a great profit on. Still getting payments on some.
13 Replies
- Folks,
This is a way I can sell properties, for a premium, that may not qualify for a conventional mortgage. I have bought several properties very cheaply, that were not what I wanted to fix up. I just sell them owner finance, get a great chunk down and above market rate interest and let them get started. If you can, I would recommend getting other financing and offer what you think they are worth.
I am not saying you cannot get good deals on owner finance, I have myself. But I have unloaded some dogs, that I did not want, that I still made a great profit on. Still getting payments on some. - Attorney · Akron, OH · Member since 2016 · 535 posts · 389 votes6y
Well, it may be nothing, but I get a red flag when you go on about two multifamilies totaling 8 units listed as seller-financing available on the open market. If they are four-plexes, they would be typically open for traditional financing. So, that tells me there may be something wrong with the properties in that the seller is trying to open the pool of buyers up to folks that would otherwise not qualify under traditional lending standards as well as opening it up to the possibility of financing where it may not be otherwise eligible.
The high price tells me they may not know what they are doing or they are trying to really take advantage of folks that would not qualify for traditional lending. There is a whole market out there where folks purchase properties and resell them at a premium via seller-financing or lease-option to folks that wouldn't qualify for traditional lending.
If you're really interested, you might as well shoot out your lowball offer or a letter expressing your interest to purchase at a lower price and asking for further communication. With seller finance, without a loan servicing company, you definitely want to get to know the seller because you'll be treating them like your landlord for the duration of the note. If they aren't interested in a lower price, they'll just throw your correspondence in the trash. Or, perhaps, you do your lower offer with a higher interest so you don't completely tank the possibility of a deal.
Good luck.
- 6yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Elijah H.:
Hello BiggerPockets!
My wife and I ran numbers on an interesting seller financing deal for two separate multi-family properties being sold together, for a total of 8 units.
The properties are in an area with low rents, and the asking price seemed a little high to us. After running the numbers, we realized we would need to be asking about half of the listing price for it to be worth it.
We know the strategy of “analyze 100, offer on 10, and buy 1” but we were just curious to hear what others had to say on how you would approach making such a lowball offer to a seller. What is proper etiquette? We’ve heard on the podcasts how you should really get to know the seller when attempting seller financing, but we also don’t want to waste anyone’s time.
Any tips or pointers would be appreciated! We are having fun practicing our numbers!
Thanks in advance!
Elijah & Isabel
First, dump the "100, 10, 1...BS". The first person that uttered those words never owned watch, or used a calendar.
Second, in order to answer this question, we need the numbers...with $$$ in front, that tell us what this deal is or isn't.
Elijah & Isabel- thanks ...is this for 4-plexs on 2 separate parcels ? I assume so...if this is the case - conventional financing should be available for each property ( not as one 8 unit loan ) ...would you live in any of he units or rent them all ....down payment required is substantial ...if engaging seller on their financing terms - ask what amount down is needed ( it will likely be large ) length or the term and the rate / payment requirements ...if you cant obtain traditional financing - seller financing is an option ....if engaging on making any offers - make sure you are fully pre approved with a lender ( if you need a loan )
- Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes6y
You can only offer what it makes sense for you to pay. We simply explain where we are at and why. That being said if you don't have the cash or private $$$ to make a cash offer and are needing seller financing for the deal I would probably not even make the offer.
The rub with seller financing comes with capex. How do you fund turning the units? What if a roof or major system goes out? In my experience the vast majority of folks wanting seller financing could be bankrupted by one. Just my $0.02 - Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes6y
Originally posted by @Elijah H.:
Hello BiggerPockets!
My wife and I ran numbers on an interesting seller financing deal for two separate multi-family properties being sold together, for a total of 8 units.
The properties are in an area with low rents, and the asking price seemed a little high to us. After running the numbers, we realized we would need to be asking about half of the listing price for it to be worth it.
We know the strategy of “analyze 100, offer on 10, and buy 1” but we were just curious to hear what others had to say on how you would approach making such a lowball offer to a seller. What is proper etiquette? We’ve heard on the podcasts how you should really get to know the seller when attempting seller financing, but we also don’t want to waste anyone’s time.
Any tips or pointers would be appreciated! We are having fun practicing our numbers!
Thanks in advance!
Elijah & Isabel
I wouldn't waste my time if it's only worth 1/2 the price. You know it's going to insult the seller and it's overpriced. Why not buy a commercial property? Although you have 8 units total > 4 units is still in the realm of residential. Seller financing is more acceptable in commercial than residential., Maybe look for a 8 unit building instead of two 4 units?
- Rental Property Investor · Franklin, TN · Member since 2019 · 160 posts · 125 votes6y
Where are the properties? Are rents below market? If so, what can they be increased to w/ cosmetic upgrades? Any rent control? Is this a high-demand, popular & growing area? If the seller owns the properties free & clear & owns other properties, he may simply prefer not to cash-out and pay capital gains. He / she may like the monthly check paid on the seller carry back note instead, deferring capital gains. It depends so much on the location and the market. These can be awesome opportunities. Agree with others, don't overpay! Need to know how much to renovate, what the market rents are and what the cash-flow will look like post-renovation. Need more info.
- 6yCory CarlsonBusiness MemberReal Estate Broker · OR · Member since 2018 · 311 posts · 226 votes
Ask the seller what their goals are. @David M Trapani hit the nail on the head. They probably want to structure the sale as a seller finance to avoid gains, and take the monthly check. If the deal is really that overpriced, you need to illustrate that even in best case scenario (pro forma) conventional financing limits this acquisition to these variables. Work backwards.
Constant Commercial Real Estate Inc543 Reviews - Contractor · Eureka, CA · Member since 2015 · 101 posts · 64 votes6y
In addition to what @James Galla said about sellers knowingly charging a premium to buyers who may not qualify for trad finance, you also run into as many stubborn sellers who just have what I call "yard sale syndrome." Meaning they're just plain stubborn and think their property is worth a lot more than it really is, aren't realistically in tune with current market and aren't willing to see a remotely fair price for it.
I would be careful.. the properties are usually in bad shape, with much of the work done by the owners themselves bc that same attitude has led them to balk at labor bids over the years and do critical work themselves... often badly. But yes, without numbers it's hard to say what's a deal. Best of luck!
- 6yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Account Closed:
In addition to what @James Galla said about sellers knowingly charging a premium to buyers who may not qualify for trad finance, you also run into as many stubborn sellers who just have what I call "yard sale syndrome." Meaning they're just plain stubborn and think their property is worth a lot more than it really is, aren't realistically in tune with current market and aren't willing to see a remotely fair price for it.
I would be careful.. the properties are usually in bad shape, with much of the work done by the owners themselves bc that same attitude has led them to balk at labor bids over the years and do critical work themselves... often badly. But yes, without numbers it's hard to say what's a deal. Best of luck!
As true as this statement is, I've found the opposite to be true more often. Besides, how many of these do you need...sellers that will work with you that is?
- Contractor · Eureka, CA · Member since 2015 · 101 posts · 64 votes6y
@Joe Villeneuve Absolutely. Being out of touch with the market goes both ways. A carpenter friend of mine stumbled into a fantastic deal. Bought a crack house/hoarder house for 80k off some older gentleman who didn't want to deal with getting them out, clean up, selling process... despite the state of it, it was still worth at least low 200's . He offered the occupants cash to leave which they gladly took, even helped them move into their new housing with his truck. Flipped it and sold for 320k, no drama or horror stories to speak of.
I guess all I'm saying is do your best to gauge the savvy and possible angle of any deal where neither of you are outright RE professionals or have a lot of experience. Sometimes it really is a deal. Im not an RE professional nor do I have a comparatively large amount of experience to the others in this forum, just putting in my 02 cents from what I have experienced. But without knowing the circumstances and numbers it's hard to give feedback to someone wanting to know.
@David M Trapani
Thank you all for the replies!
The properties were 2 multi-families across the street from each other: a 5-plex and a triplex listed for $650,000. 6 1bd/1b & 2 studios. The 5-plex exterior looked to be in decent shape from photos, the triplex would need a facelift...no photos of the inside...
It looked to be in about a “C” neighborhood in a somewhat rural area, so rents would be around $750/$650 a month (super low compared to Seattle/South Sound area where we’re currently located)
We appreciate all your replies and advice on seller financing! We hadn’t seen a 2-in-1 multi family listing before and wanted to hear how others have approached seller financing situations, especially when submitting a low offer. We’re not going to pursue it but enjoy having this platform for knowledgeable input! Thanks again!
- 6yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Account Closed:
@Joe Villeneuve Absolutely. Being out of touch with the market goes both ways. A carpenter friend of mine stumbled into a fantastic deal. Bought a crack house/hoarder house for 80k off some older gentleman who didn't want to deal with getting them out, clean up, selling process... despite the state of it, it was still worth at least low 200's . He offered the occupants cash to leave which they gladly took, even helped them move into their new housing with his truck. Flipped it and sold for 320k, no drama or horror stories to speak of.
I guess all I'm saying is do your best to gauge the savvy and possible angle of any deal where neither of you are outright RE professionals or have a lot of experience. Sometimes it really is a deal. Im not an RE professional nor do I have a comparatively large amount of experience to the others in this forum, just putting in my 02 cents from what I have experienced. But without knowing the circumstances and numbers it's hard to give feedback to someone wanting to know.
f
"Sometimes it really is a deal".
No, it's ALWAYS a deal. Your goal isn't to buy properties, it's to control deals. This is why Market Analysis is so important.
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