Is Seller Financing Really Effective?

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Is Seller Financing Really Effective?

Account Closed
Na · Member since 2020 · 12 posts · 3 votes

Is Seller Financing really an effective method to get access to multi-family units? I’ve been listening to BiggerPockets podcasts and reading about it - I just can’t process that to be something that really works in this industry. Has anyone had success with doing a seller financing deal recently - and how did you go about finding & negotiating that deal? I’d love to hear some success stories or just any advice on how to go about doing a deal like that!

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Bryan Noth
Realtor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
4y

@Account Closed

Extremely effective when the owner/investor is conferred with taxes or has a specific payout plan in mind. 

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    Why would you think it doesn't work?

    1Reply
  • Bryan Noth
    Realtor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
    4y

    @Account Closed

    Extremely effective when the owner/investor is conferred with taxes or has a specific payout plan in mind. 

    4Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    4y

    @Cade Gardner we bought our first multifamily (a quadplex) using seller financing. The seller was offloading a large portfolio and liked the idea of spreading out their cap gains hit over a few years. We offered a rate slightly higher than prime, 5 year balloon amortized over 30, interest-only payments to increase cash flow. It was easy, we just wrote up a promissory note. Actually a lot easier (and less closing costs) than using conventional financing. The hard part is finding a seller willing to carry the note, but there may be tax advantages for them to do so and they will also make more on the sale due to collecting a few years of interest on top of the sale price.

    1Reply
  • Dan Maciejewski
    Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
    4y

    @Steve K.  is right.  That's usually how I see it done.  

    And that's the seller that usually takes it.  Someone making a lot of income and/or unloading a lot of property.  It's a good way to avoid capital gains taxes and/or to keep cash flow without having to run the property anymore.  Basically, real investors are the ones open to it.  The ones that have heard of it and that have done it before.  Not the guys with one or two properties that just want to take advantage of the market and walk away with a big check.

    It's actually pretty common, and our Florida Realtor contract has addenda and options for it built right in.  Assumptions, too, but they are way less common with the rates the way they are right now -- nobody want to assume a mortgage with a 5+% rate when they could get better anywhere.   I prefer an attorney-written note, but if the buyer and seller agree, then whatever makes it work.

    2Reply
  • Tom S.
    Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
    4y

    @Account Closed My first 3 investment properties were all seller financing, so agree with the above posts, very effective.  My next 2 had some seller financing, generally in the form of a 2nd mortgage.

    The hardest part is finding it and also having the numbers work as well.  I've seen lots of properties where the seller is just using the financing to upload crappy property on a newbie.  So lots of digging, lots of research, and typically I was getting about one property per year where all the ingredients came together.

    Good luck!

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  • Account Closed
    OP
    Na · Member since 2020 · 12 posts · 3 votes
    4y

    @Joe Villeneuve

    I think I over-analyze everything, haha. To me, it just sounds like one of those situations that is too good to be true. I really want to educate myself on seller financing because I think it would be a great way for me to acquire new properties . Do you know if any good resources that will help me understand the process a little better and more in depth?

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  • Account Closed
    OP
    Na · Member since 2020 · 12 posts · 3 votes
    4y

    @Steve K.

    Oh wow! It sounds like you had a solid plan going into that deal. As far as learning in Ins and Outs of seller financing, what would be the best way for me to learn how to structure a deal that works for everyone? I’m only 19, so I think the other issue is people not trusting a 19 year old enough to run their property and carry the note.

    0Reply
  • Jill F.
    Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes
    4y

    We've had good luck getting sellers to carry back seconds on our commercial dscr loans to reduce our out of pocket. Our bank usually wants us to put down some so we've done 75% bank, 15% seller finance with second, 10% down oop. Bank insists on first position.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y
    Originally posted by @Account Closed:

    @Joe Villeneuve

    I think I over-analyze everything, haha. To me, it just sounds like one of those situations that is too good to be true. I really want to educate myself on seller financing because I think it would be a great way for me to acquire new properties . Do you know if any good resources that will help me understand the process a little better and more in depth?

     PM me

    0Reply
  • Nicole Heasley Beitenman
    Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    After listening to over 500 episodes of the BP podcast and hearing seller financing discussed as a strategy NUMEROUS times, you can't deny it's effective. 

    0Reply
  • Steve K.
    Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
    4y
    Originally posted by @Account Closed:

    @Steve K.

    Oh wow! It sounds like you had a solid plan going into that deal. As far as learning in Ins and Outs of seller financing, what would be the best way for me to learn how to structure a deal that works for everyone? I’m only 19, so I think the other issue is people not trusting a 19 year old enough to run their property and carry the note.

    It's not complicated but you're correct that it may be challenging at your age. It helps to have some experience, credibility, and most of all you will usually still need some sort of down payment. In my experience these arrangements usually have a slightly higher down payment and interest rate than conventional financed deals, but rate and terms can be whatever both parties agree to. I try to let the other party name their terms then negotiate from there. 

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    4y

    I've purchased and sold many with SF.  Tired landlords are used to the monthly and want to spread out the tax hit.  After 2 decades Ive become one.  LOL 

    3Reply
  • Carlos M.
    Investor · Lancaster, PA · Member since 2016 · 94 posts · 356 votes
    4y

    @Cade Gardner we ASK for it in every deal. Just because your not familiar with it or not comfortable with it doesn’t mean it won’t work. The most important thing is having a realtor on your side that understands it and will educate the seller on all the benefits for them.

    I typically look

    For the seller to hold a 10% second so I only need 10-15% equity to get the deal done.

    My first deal with any owner financing was a 6 unit for $325 they held a $30k second.

    I did another 6 unit and did the same thing with the 10% second.

    We did an 11 unit and my realtor talk the listing agent into both of them loaning me their commissions!! Not my idea but my realtors!!

    Did an 15 unit and the seller held a 10% second which came out to be $140k.

    Last year we did 25 units for 1.7 million. I put $200k down and the seller financed the rest. They are 75 years old getting out of the game , and wanted the monthly income with out paying the huge capital gains exposer.

    I have my youngest “student “ ( I mentor a few selected individuals for free) under contract for a deal. He is putting down 130k and the owner is going to finance the rest of deal . Sale price is 1.3 million and my student is only

    27!!!!!

    Again, find a realtor that is comfortable with it and also find a lender that will work with you only

    Putting 10% skin in the game. It’s 100% possible.

    0Reply
  • Bud Gaffney
    Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
    4y

    Extremely effective.

    0Reply
  • Bud Gaffney
    Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
    4y

    I'm always looking for SF deals...

    0Reply
  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    4y

    It's a tool. Like any other tool, it needs to be the right one for the job. 

    Seller financing has many benefits to both parties, but it's not right for every situation. 

    See: https://www.biggerpockets.com/...

    Copeland Morgan LLC4.770 Reviews
    WebsiteView Page
    1Reply
  • Eric Morel
    Member since 2021 · 98 posts · 53 votes
    4y

    I am working on one now.  It will be my first property.  It is difficult to find someone that will consider it though.  I have offered in a few cases before today and turned down before I could even explain the deal. Found a condo with a cap rate of 8%.  Needs miner repairs, but rentable in the condition it is in.  Rents for 900-1000. Purchase price is 79K or less.  In a 2.5 star neighborhood. If it doesnt work, it doesn't hurt to offer.

    1Reply
  • David M Trapani
    Rental Property Investor · Franklin, TN · Member since 2019 · 160 posts · 125 votes
    4y

    Highly effective. It’s possible  to build a long-standing relationship with seller (holder of the seller carry-back note). With the right lender, you may 1031 and “walk the note” to acquire different properties as you go & scale. A win-win for all parties.

    0Reply
  • Craig Parsons
    Contractor · Orofino ID, Hollister CA · Member since 2021 · 139 posts · 71 votes
    4y

    @Cade Gardner absolutely it's effective I bought one 2 months ago from a tired landlord. I figured out what her monthly net was and then increased it by 100 bucks so from my payments she has zero hassles and more money. I paid enough down just to cover closing costs so she didn't have to pay to sell the property.

    0Reply
  • Steven TawreseyPro Member
    Flipper/Rehabber · Bainbridge Island, WA · Member since 2009 · 97 posts · 70 votes
    4y

    @David M Trapani

    Can you please explain ‘walk the note’ means?

    0Reply
  • David M Trapani
    Rental Property Investor · Franklin, TN · Member since 2019 · 160 posts · 125 votes
    4y

    Hi Steven,

    Yes, happy to.

    If you own a property with a seller carry back & you've maximized cash flow and / or appreciation or you’re ready to get a new property...ask the seller if they will continue lending you those funds on your next property.

    If yes, then open 2 escrows -  one for the property you’re selling & the other for the property your’e buying (you may also have a 1031 escrow if your doing an exchange).

    Instruct the title company on the property being sold NOT to pay off the note holder. Instead they wire loan funds to replacement property escrow. 

    Perfectly legal - blessed by CPA’s.

    Instruct replacement property escrow to craft a new note and mortgage (same terms & conditions) to be the new first mortgage.

    You now have the down payment (you may add more of your own cash if you like) for the new property tax free. 

    Note holder also defers taxes.

    It’s a win-win.


    0Reply
  • Sean Gregg
    Rental Property Investor · Stow, OH · Member since 2015 · 14 posts · 4 votes
    4y

    Extremely effective and a win/win for both buyer and seller. Retiring/ tired landlords who want to exit there portfolio stand to collect mail box money, interest payments, and save on their taxes, and potentially receive there asking price. This also provides a positive scenario for retiring landlords to pass their properties down to the next generation. I think there is significant opportunity out there in educating mom/pop landlords that otherwise just assume they have to sell via MLS.

    My experience: 4 duplex package, 840k PP, no money down, 5.5% interest, 30yr amortization, balloon payments in 5,6, and 7 years, 1 of the duplexes was purchased with a VA loan effectively cashing out that property and providing a lump sum in lieu of a down payment (Mar 2018)

    1Reply
  • Michael E.Pro Member
    New to Real Estate · Saginaw, MI · Member since 2021 · 89 posts · 115 votes
    4y
    Originally posted by @Account Closed:

    Is Seller Financing really an effective method to get access to multi-family units? I’ve been listening to BiggerPockets podcasts and reading about it - I just can’t process that to be something that really works in this industry. Has anyone had success with doing a seller financing deal recently - and how did you go about finding & negotiating that deal? I’d love to hear some success stories or just any advice on how to go about doing a deal like that!

     There was a podcast episode With Pace Morby Episode 528, that you might find interesting. He does a lot of seller financing and "sub to".

    0Reply
  • Robert Jordan
    Handyman · Moretown, VT · Member since 2016 · 26 posts · 6 votes
    4y

    Hasn't worked for me yet. I've been trying for a number of years and the only sellers I could get interested were with properties that the arv would not have bewm worth the work.

    It has also been my humble experience that Realtors primarily won't cater to such buyers unless you have had a lengthy relationship, prequal, + pRoof of funds or are coming with 25-50% down.

    0Reply
  • Steven TawreseyPro Member
    Flipper/Rehabber · Bainbridge Island, WA · Member since 2009 · 97 posts · 70 votes
    4y

    @David M Trapani

    Thanks for the explanation. Cool tool. I've done a few seller financed deals, and struggle explaining the benefits to the owner in a way they (usually not financially literate) can understand. 

    So, "Walk the Note," without all the title work and at its simplest explanation, is that the sellers note gets removed from the initial property and transferred to another property. Seller keeps getting paid terms from original note, but original property is no longer the collateral. 

    Could this be done with a BRRRR? Seems like the timing would be nearly impossible to line up.

    0Reply
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