Seller Financing, The BIG Question

10 Replies

I have been looking at FSBO and I have been talking to some of them asking questions like how long has it been on the market, why are you selling, why are you selling it yourself and the norm questions. I want to ask if they are willing to finance, what are the typical deals when a home owner finance the property.

Originally posted by @James Clark :

I have been looking at FSBO and I have been talking to some of them asking questions like how long has it been on the market, why are you selling, why are you selling it yourself and the norm questions. I want to ask if they are willing to finance, what are the typical deals when a home owner finance the property.

 That's a great first step. Now to complete the qualifying process simply ask them "are you willing to assist a buyer in financing the purchase of the property?". You're likely to get one of two responses; No (which is really not a no until they've rejected an actual offer (and for me they need to reject it at least three times) or what do you mean (or what do you have in mind). 

If the answer is the latter then you should already be prepared with a potential structure based on the quick analysis you may have already completed prior to making your call.

I just made that exact same yesterday. The seller asked what I meant so I told him financing 30% of the purchase price (I already knew I'd need at least a 25% carry back to buy it quick using hard money). I did say in what position the carry back would be in. His next question was "so you would pay 70% at the closing?". My answer was "yes, I could pay you 70% at the closing with the amount you finance if it is subordinate to my new loan". Him "I could do that".

Originally posted by @James Clark :

I have been looking at FSBO and I have been talking to some of them asking questions like how long has it been on the market, why are you selling, why are you selling it yourself and the norm questions. I want to ask if they are willing to finance, what are the typical deals when a home owner finance the property.

 They are typically bad deals that aren't selling any other way.  Might have potential IF (big if), you know something others don't or you're super creative and can build value into transaction.  Assume it's a bad deal until you find all the problems with the deal and can effectively solve them.  As an investor you are a problem solver and risk manager.  If you don't ready feel that way, I'm confident you will over time.

Look for deals with problems you can solve (not related to location).  Top: typically managment or structural fixers.  And make sure you negotiate the deal to a low enough price that you are PAID fairly for your work/value you add.

ask if there is a mortgage in the property. If they say they own it free and clear, ask them the following: " if I could show you how I could purchase the property and you could have a monthly income on the property, would that be of interest to you?" They will ask you what you mean, tell them. If they take call cash , they might put the money in a CD or a money market and get next to nothing. If you offer them 5 or 6% they are doing well. In addition they are not paying capital gains on the loan amount. If you can structure the deal with seller financing, try to do it so there is no " due in sale" clause so that thou can sell the property and offer seller financing to your buyer.  If you can charge more than the interest rate you are paying, you can make money in the margin. 

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rick stein pegged it, due on sale clause is a big deal

also try to have a First Right of Fefusal in the note so if they try to sell the note prior to maturity, you can match any offer they get. If you are able to negotiate a low rate on the  note, they would have difficulty selling the note with that rate. The only way for the purchaser of the note to get a better return would be to buy the note at a discount. You would have the right to match that offer and then own the property free and clear and, effectively, have gotten a discount off the original purchase price. I have that clause in every one of my seller held notes.

Thanks @Christopher Telles @Jon S. @Rick Stein

I  appreciate the advice. Did not think of the mortgage, that would be valuable info of what the home owner stands at.

Ok I'm confused on the note part,

First Right of Fefusal in the note so if they try to sell the note prior to maturity, you can match any offer they get. I guess I should be asking what the process is of obtaining a FSBO. I have read and reread a lot of books on real estate and BOOM I get lost again. LOL never ending learning.

yes, if they get an offer, you have the right to match it. Please explain what you mean by obtaining a FSBO.

@James Clark , good job qualifying your sellers. Now take the next step. Ask the seller to carry. You don't get everything you ask for, but you don't anything you don't ask for. Basically, I totally agree with everything @Christopher Telles told you.

That being said, do you need or even want seller financing? What are you planning to do with the project? If you're going to wholesale it, do you know if your buyers want seller carry? Many don't, so know your market. If you're looking to rehab and flip it yourself, seller financing can really grease the bearings of getting the deal done. If you're planning to buy and hold, look very carefully at the terms the seller wants. You could be stuck with it for a long time.

I wouldn't worry all that much about the due on sale clause, however, if you're planning to hold the property, you might want to consider a sales-lease option (which could, but probably won't trigger "due on sale") or a land contract, which almost certainly won't cause acceleration. If you're flipping, there's just nothing to worry about. The bank won't foreclose before you've finished and sold the property. No sweat!

The note part that @Rick Stein was referring to is the promissory note that you'd sign that's really a sophisticated I.O.U. Sometimes sellers will sell these notes to others to liquidate cash, but probably not the sellers you're talking to. A bigger issue is making sure that the financing is in compliance with Dodd-Frank laws. Get a qualified broker to assure that originating this loan is not going to land you or your seller in court. Wrapping the existing financing is probably easier to understand. If you're not sure what any of this means, then by all means ask until it's clear. This is important.

Good job so far. Keep moving forward. You're doing great.

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