Do people only use seller financing when it’s a buyer’s market?

9 Replies

I’d like to approach landlords to see if they want to sell me their property in exchange for a $10000 down payment, $5000 of which is used for closing costs, and $5000 of which is paid for with seller credits. This would also include an amortized loan from the seller with 4% interest and a balloon payment after 5 years which I can refinance out of into a conventional mortgage. I'd like to do this refinance much sooner, possibly after 1-2 years.

My issue is that I don’t want to overpay for the property, putting me into negative cash flow territory.

Is seller financing nearly impossible in a seller’s market?

I would say the only people that will go for that deal are:

1. dont know any better

2. have a very troubled property and just want to exit any way possible. 

or you buying in an area say like Gary Indiana or some other area were there are thousands of vacant homes.

Another way this could work: If the seller is young/savvy, they could sell you a house with seller financing if they don't want to pay the taxes that come with a traditional sale. They keep getting payments every month and can spread that tax hit out over time. 

Unfortunately, you're going to pay private money rates at 8-10%. A blind squirrel can make 4% in this market. You have to look at it from their point of view and see if it makes sense for them as well.

I bought 4 houses from a friend of mine because he was burned out from managing them himself over the last 10 years, but didn't want the taxes from selling them outright. We did a 30 year loan with a pre-payment penalty that decreases for the first 5 years, so I didn't just acquire the properties, then refinance and undermine the purpose of the seller financing.

This is obviously a miniscule percentage of all sales, but another talking point you can use when you're discussing with sellers. Good luck!

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Originally posted by @Dave Poeppelmeier :

Another way this could work: If the seller is young/savvy, they could sell you a house with seller financing if they don't want to pay the taxes that come with a traditional sale. They keep getting payments every month and can spread that tax hit out over time. 

Unfortunately, you're going to pay private money rates at 8-10%. A blind squirrel can make 4% in this market. You have to look at it from their point of view and see if it makes sense for them as well.

I bought 4 houses from a friend of mine because he was burned out from managing them himself over the last 10 years, but didn't want the taxes from selling them outright. We did a 30 year loan with a pre-payment penalty that decreases for the first 5 years, so I didn't just acquire the properties, then refinance and undermine the purpose of the seller financing.

This is obviously a miniscule percentage of all sales, but another talking point you can use when you're discussing with sellers. Good luck!

I never could understand the tax aspect you still have to pay tax as you receive the payments its does not limit your tax liability.  Just reduces your cash flow on the note..  I sell my left over houses usually on ZERO % financing like right now I have 2 in cleveland i would do that with.. great deal for someone who can handle larger than normal payments and wants to own them free and clear in a few short years.

@Jay Hinrichs correct, it doesn't decrease the tax liability, it just spreads it out over time. It worked for him and I'm fine with it because I plan on holding these for a long time and I didn't have the up front cash for a traditional purchase, and they still cash flow well with zero money from me up front. I'll probably refinance in a while but I'll hold my end of the bargain. 

@Dave Poeppelmeier my 0% loan deals are a BRRR investors dream.. these are BRRRR homes.. so instead of paying cash or HM they get to get control of the deal and pay ZERO interest while they rehab and then refi and pay me off. win win.. I have never had a zero % seller carry back EVER default.

Originally posted by @Dave Poeppelmeier :

@Jay Hinrichs correct, it doesn't decrease the tax liability, it just spreads it out over time. It worked for him and I'm fine with it because I plan on holding these for a long time and I didn't have the up front cash for a traditional purchase, and they still cash flow well with zero money from me up front. I'll probably refinance in a while but I'll hold my end of the bargain. 

I get it for you as the buyer.. was just saying not sure what the benefit to the seller is unless the seller is getting a premium on price the tax is the tax regardless of when you pay it.  Just sayin and its only my thought process  if it works for that seller thats all that matters right.

@Mike Schorah   at what price point are you looking to buy a house with only $5000.00  to the seller upfront?  I don't think this would be very attractive to a seller because you have so little invested. Even someone who doesn't want to take a capital gains hit will not find this attractive since there is little room for a market drop. 

@Mike Schorah maybe I am misunderstanding something, but it sounds like you want to buy a property with $0 down payment. The $5000 seller credits are not down payment and the actual $5000 goes towards closing costs. That means you theoretically have $5000 equity, but it is basically just the seller bumping the price up $5000 to give it to you. 

The 4% interest rate is a great deal for you. You can't go to a bank and get that interest rate on an investment property. Why would a seller give you a better rate than the bank and 100% finance? They are taking all the risk with no premium for the higher risk deal.

It is not that sellers financing is impossible in a sellers market, but trying to do it at unreasonable terms for the seller may be difficult. Financing a deal at 100% may make it harder to cash flow, which increases risk for you and the seller.

Like @Jay Hinrichs said, you will need to find someone who doesn't know better or has a dog they are trying to unload. 

Hey Mike! To answer the question at the end of your post, fortunately seller financing is indeed available whether it's a "seller's market" or a "buyer's market."  There are always sellers who need the benefits that seller financing can provide them (income, capital gains tax deferral, a reasonable return secured by a tangible asset, etc.).  The terms of each loan will be different, of course, based on the seller's unique situation.  And whether you can accomplish $0 down is very unique to that particular seller (I'd say that's very rare in my experience).