Off-market owner financing
Member since 2022 · 1 post · 1 vote
Off-market owner financing
Most Popular Reply
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
3yQuote from @Carissa Mennen:
I have my eye on a 10-unit property and I want to ask the owner if he would sell it to me with owner financing.
What would be the best way to approach this conversation? I'd like to know what's in it for him
This has been my favorite and most successful strategy. SF from long-time landlords I know, off-market.
I would start by casually planting the seed. If you ever think of selling, please let me know.
When they do express an interest, the benefits to them are headache free cash flow that spreads out the tax burden.
6 Replies
@Carissa Mennen Congrats on finding a potential deal. especially one next door so you know the area well already!
If the owner can do owner financing, just come up with some terms that you both agree to (downpayment, interest rate, balloon payment, etc). You can then have an attorney draft it up as a formal contract. I've done a number of deals as a buyer and that's usually how we arrived at it.
Of course, you also need to see if the owner can do the financing. If there's still a balance on the mortgage, then that will have to be addressed in order to get clean title. Or the seller might need the funds for something else.
Good luck!
- Lender · Member since 2022 · 338 posts · 374 votes3y
Yes congrats on a potential deal! I think if you see him in passing often just bring it up casually but be a little more serious about the inquiry - that should lead into other details such as owner financing - best of luck.
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes3y
You are obviously a reliable buyer, someone who will close. Seller finance is a great way to sell a property, you end up making a lot more at the end of the life of it's loan. If the owner agrees to 100k, his grandkids will have made 300k once the notes due
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Quote from @Carissa Mennen:
I have my eye on a 10-unit property and I want to ask the owner if he would sell it to me with owner financing.
What would be the best way to approach this conversation? I'd like to know what's in it for him
This has been my favorite and most successful strategy. SF from long-time landlords I know, off-market.
I would start by casually planting the seed. If you ever think of selling, please let me know.
When they do express an interest, the benefits to them are headache free cash flow that spreads out the tax burden.
- 3yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
Buyers may also enjoy several benefits should they elect to buy an owner-financed home, such as:
- Greater access to financing opportunities, especially for low-income buyers
- Lower expenses associated with closing costs
- More flexible agreement terms
- Potential for no PMI premiums
- More accessible for those with poor credit.
Read this article for more information https://www.rocketmortgage.com...
Good luck!
NETWORTH BUILDERS5236 Reviews - Lender · Tampa, FL · Member since 2020 · 113 posts · 119 votes3y
When it comes to seller finance, I've found that unless someone is hyper-analytical, it's all about the pitch and framing and less about the numbers. Essentially the goal is to make someone FEEL GOOD about seller finance. If pitched incorrectly, someone can get confused and a confused mind will always say no.
Here's how I approach a potential seller finance deal, step-by-step
1) Is Seller Finance the Seller's Best Option
Seller finance can be the very best way to sell a property. From the seller's perspective; you get a higher purchase price, closing is very straightforward and there's no financing contingency, don't have to pay an agent or broker out of proceeds, it's truly passive income, you could potentially recollect and resell the asset, capital gains taxes are deferred as you receive payments, and if you need the liquidity at any point you can sell the note.
However, seller finance isn't the best option in these scenarios:
- Seller wants to roll proceeds into a new property, including if there are plans for a 1031 exchange
- Seller has a strong desire to immediately receive the cash for the property, or has a desire to 'wipe their hands clean' of the place and never have to think about it again
- There is an existing loan in place. While you can purchase hybrid (seller finance and sub to), frequently the cash flow numbers are tight and it's a more difficult pitch
2) You've Determined Seller Finance is the Best Option for the Seller
Based on the information you have, you know seller finance is in the best interest of the seller. Now your job becomes getting the seller to make up in their own mind that seller finance is their best option so THEY want to sell that way, you shouldn't need to convince them.
I find that for landlords who bought for passive income I like to ask if they'd just like to turn the property into passive income. That way I can give them more money that I'd otherwise be giving to the bank, we can close quicker, and they don't get hit with a huge capital gains bill. Typically you'll end up providing a cash offer and a seller finance offer. Cash/financed offer will always be lower price because you need to pay the bank at that point.
3) Finding Terms
For the buyer, best case scenario is less than 5% down and 0% interest. This is achievable (we've done it with single-family homes) by giving a much higher purchase price. 0% interest is good for the seller because they will get taxed based on the long-term capital gains rate, as opposed to the ordinary income tax rate if they're collecting interest payments. For you as the buyer, this is great because even though you're 'overpaying' for the property, every payment you make goes 100% towards equity.
However, as long as you structure terms where you're hitting your cash-on-cash return and don't have a balloon for at least 7-years, you're good to go. Adjust the terms so it's a win for both parties.
Your Other Questions
Tax Benefits: The seller will still need to pay long-term capital gains, the difference is it will be deferred as they collect principal payments. Pushing off the payments is a big win in terms of the time value of money, but the total $ amount will end up being the same. If the seller collects interest on the payments, they will get taxed as ordinary income. NOTE I'm not a tax professional, please verify this info with someone who is, this is my best understanding of tax advantages
Working with a Broker: Personally, once deals get into creative finance, I think agents and brokers do more harm than good unless they've bought using creative finance themselves. If you need help structuring a deal this way, you're much better off asking for help from another investor and telling them you'll pay them for structuring the deal. We use a 3-page off-market contract that is very simple and basically just tells the title company how to handle the transaction and who's getting paid out at closing.
If you haven't done seller finance before, I'd ask for help from an investor on your first one. Some of the finer details such as default and processing payments need to be established before going under contract so you can minimize the deal risk. You can use a realtor contract, but I personally find them confusing and you'll probably need to have a realtor involved to use that contract legally.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.