Seller financing: do you ask on every deal, or only when the deal screams for it?

Question

(Posting this for the BiggerPockets Investor Brief. Your reply might run in Thursday's edition.)

On this week's BiggerPockets Podcast, Philip Henry said he proposes seller financing on every deal he goes after, and it works about 90% of the time. That's how he picked up a $1.2 million, 31-unit building with the seller carrying 10% and none of his own money in it.

So where do you actually stand? Do you ask on every offer, or only when the signs are there: free and clear, a tired landlord, a listing that's been sitting?

Give me your thoughts and if you've never asked, tell me what's stopping you.

Igor Ganapolsky · Answer

David's point about tax sales hits home for me. I buy properties at tax deed auctions down in Florida and you're right - there's zero financing available at the auction itself. It's all cash, winner takes it that day. But here's where seller financing comes back into play for me. After I pick up a property at auction, I'll often sell it to an end buyer who can't get traditional bank financing because the property needs work or doesn't meet lender guidelines. That's when I offer seller financing myself. The buyer gets the property without waiting 60 days for bank approval, and I get monthly payments at a decent interest rate. Win-win. So yeah, I don't ask for seller financing when buying at auction because it's impossible. But I absolutely offer it when selling. Probably 40% of my resales end up with me carrying paper. The key is making sure your promissory note is solid and you've got a real attorney draft it. Don't download some template off the internet for this.

David Krulac · Answer

@Garrett Brown Because of the source of my deals (bought and sold over 1,000 properties for my own inventory), attaining 90% seller financing is not happening. When I did the research on my own purchases here are the sources:

Verbal auctions 58%

Tax Sales 31%

MLS 25%

FSBO 19%

Estate/Probate 15%

Sealed Bid Auction 15%

Word of Mouth 13%

VA Repossesions 10%

HUD Repossessions 6%

Bank Reposessions 2%

Relocation Companies 2%

Life Estate 1%

Total is more than 100% as some purchases were in more than one catagory. The sheriif and the tax office never finance their sales. We did finance 7 properteis through the VA, but they are very selective on what they will finance. HUD will finance some of there properties in better condition, but they only finance to owner occupant not investors.

Jim Bob · Answer

I'm at 80% open outcry courthouse auctions until they went online, and then 20%, since too many bidders and lowered research costs reduced profit potentials too much. I also offer owner financing when selling, usually like bridge loans.

Vaibhav Puranik · Answer

In general debt can increase returns of a property. Seller financing is an extremely useful tool. In general, the terms of the seller financing are much more negotiable and not as strict as the professional lenders. That is why seller financing enables the buyers to get better terms, lower interest rates (which can certainly help in today's environment) and in general easier financing. I agree with Henry and I would ask every time too. In fact this post made me realize that I should be doing it every time.

John Leland · Answer

He said "said he proposes seller financing on every deal he goes after, " That's a fair statement, it's what we do as well - but the catch is we are picky about what we go after in the first place. If one is looking for specific situations and types of properties, one can build their business around that process. When a salmon boat goes out fishing they are looking for salmon and are authorized for certain territories and limits. but halibut and bass sometimes get caught in the nets. So, purpose and results can overlap.

His comment “and it works about 90% of the time” is not consistent with what we experience. That is like someone saying they hit a grand slam every time they are at bat. We get a high percentage of a small group of target properties and that is very profitable. But, we don’t get 90%.

The part though that is unsettling is “none of his own money in it” Houses built on sand don’t stand or survive a storm. Just as businesses built on poor business practices don’t survive scrutiny. When we or our investors put money into houses, they want to survive “the certainty or uncertainties” and come out ahead. There are always surprises that require capital to resolve. Every investor that claims they have “none of his own money in it” is either ‘unschooled” in investing or “fake it til you make it” and real estate investing is certainly full of such approaches, which we avoid.

Jay Hinrichs · Answer

this is very common for those of us that bought at tax sale especially the land guys.. its how the industry works.

Jay Hinrichs · Answer

seller finance like what was talked about is very rare in the real world.. can it happen sure did it happen for this guy sure.. but 31 units for 1.2 mil is clearly a HOOD RAT property that the seller was looking to unload on who ever would take it.. is my thought.

Seller financing: do you ask on every deal, or only when the deal screams for it?

Seller financing: do you ask on every deal, or only when the deal screams for it?

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