Seller Financing

26 Replies

Hey Everyone,

I am looking for creative ways to fund my 1st deal. I've missed a few opportunities because I didn't have a plan for financing soon enough and I would like to avoid this problem the next time. Does anyone have experience with seller financing? I think this would be the most ideal situation for me because it would give me the ability to work with the seller directly instead of searching for private investors. Any advice for finding seller financing?

Hi @Elijah Grant

All of my seller-financed houses and apt bldgs have been from tired boomer+ landlords that want to retire from the headaches, but like the monthly.  They have been self-managing for years and don't like PMs or agents.  They own free and clear.  They know a SF transaction can help their cap gain tax situation and provide them a decent return on their equity.  More than the <1% they'll get in a bank anyway, lol.

I find them mostly by calling crude for rent ads I see in windows or ads in the newspaper that are landline phones.  Some are active online, but most are not. Decent, but tired looking plex owners get a postcard from me as well.  If I see an old dude mowing the lawn at a plex, he gets a card too!  

They are not Jack and Jill homeowner listed on the MLS that have a mortgage and need to buy again.

I have never seen one playing on a phone.  They like diners in the morning. They are often in Lowes or Home Depot getting supplies and they wear work clothes.  

Be on the look-out for your 'target seller' and strike up conversations.  Take different routes to work and look for tired plexes. Look up the owners and send them a postcard.  Most own multiple buildings.  Good luck to you! 

Thanks @SteveVaughan! That's really great advice. I will start by looking for crude ads. 

Thanks Again!

@Elijah Grant The advice from @Steve Vaughan is great. Have you also thought about sub2 (taking over payments)? That is another lucrative way to get in real estate with little or no money. 

Originally posted by @Elijah Grant :

@Cameron Tope do you have any tips for taking over payments? How have you found leads? 

 You must bring the loan current so ensure the unpaid balance is relatively low. I always look to owner finance my sub2's and thereby look for loans with low monthly payments (30 yr amortization and sub 4.5% interest rate). 

How do I find deals? Like everyone else. Market. Market. Market.

@Steve Vaughan thanks for sharing this great advice! I'm in a similar boat and this gives me a couple places to start hunting for seller financing opportunities.

Can someone explain the owner finance process on a multi family that is owned free and clear by the seller.

Also how this would be possible with no down payment.

Originally posted by @Bruce L. :

Also how this would be possible with no down payment.

 It wouldn't. Consideration must be exchanged for a transaction to be legal. 

Originally posted by @Steve Vaughan :
Originally posted by @Bruce L.:

Also how this would be possible with no down payment.

 It wouldn't. Consideration must be exchanged for a transaction to be legal. 

 how much should be the minimum down payment?

and what about the interest rate to offer?

what are the pros and cons for both, seller and buyers?

Thank you for the great input on this @Steve Vaughan !!  Very appreciated to read the good action steps!  

Originally posted by @Cameron Tope :
Originally posted by @Elijah Grant:

@Cameron Tope do you have any tips for taking over payments? How have you found leads? 

 You must bring the loan current so ensure the unpaid balance is relatively low. I always look to owner finance my sub2's and thereby look for loans with low monthly payments (30 yr amortization and sub 4.5% interest rate). 

How do I find deals? Like everyone else. Market. Market. Market.

 Thank you!!  Great input to read !

Originally posted by @Steve Vaughan :

Hi @Elijah Grant

All of my seller-financed houses and apt bldgs have been from tired boomer+ landlords that want to retire from the headaches, but like the monthly.  They have been self-managing for years and don't like PMs or agents.  They own free and clear.  They know a SF transaction can help their cap gain tax situation and provide them a decent return on their equity.  More than the <1% they'll get in a bank anyway, lol.

I find them mostly by calling crude for rent ads I see in windows or ads in the newspaper that are landline phones.  Some are active online, but most are not. Decent, but tired looking plex owners get a postcard from me as well.  If I see an old dude mowing the lawn at a plex, he gets a card too!  

They are not Jack and Jill homeowner listed on the MLS that have a mortgage and need to buy again.

I have never seen one playing on a phone.  They like diners in the morning. They are often in Lowes or Home Depot getting supplies and they wear work clothes.  

Be on the look-out for your 'target seller' and strike up conversations.  Take different routes to work and look for tired plexes. Look up the owners and send them a postcard.  Most own multiple buildings.  Good luck to you! 

 Great Action Steps to get some traction on this.....thank you, Steve!!

Originally posted by @Steve Vaughan :

Hi @Elijah Grant

All of my seller-financed houses and apt bldgs have been from tired boomer+ landlords that want to retire from the headaches, but like the monthly.  They have been self-managing for years and don't like PMs or agents.  They own free and clear.  They know a SF transaction can help their cap gain tax situation and provide them a decent return on their equity.  More than the <1% they'll get in a bank anyway, lol.

I find them mostly by calling crude for rent ads I see in windows or ads in the newspaper that are landline phones.  Some are active online, but most are not. Decent, but tired looking plex owners get a postcard from me as well.  If I see an old dude mowing the lawn at a plex, he gets a card too!  

They are not Jack and Jill homeowner listed on the MLS that have a mortgage and need to buy again.

I have never seen one playing on a phone.  They like diners in the morning. They are often in Lowes or Home Depot getting supplies and they wear work clothes.  

Be on the look-out for your 'target seller' and strike up conversations.  Take different routes to work and look for tired plexes. Look up the owners and send them a postcard.  Most own multiple buildings.  Good luck to you! 

 @Steve Vaughan,

Can you give an example of the financials involved in one of your plexes assumed by this method? 

Thanks,

Bruce.

@Bruce L.  I'll give you an example even with 'nothing down' from my pocket, but not 'with no down payment'.  There's a big difference.

In 2005 I bought a 7-plex of side-by-side 1000sqft 2 bed townhome apts a mile from my house from a 68-yo private seller that had them since about '86.

B class property and neighborhood.  $345K, $45k down (though he carried a $15k 2nd for 3 yrs at 7% and we pulled $30k from my ROTH penalty-free for the bal), 30-yr term at 6% (with a rate adjust to residential prime rate +1 at yr 15).  PI of $1898/mo. Rents were $3700/mo at the time.  Now they are $6000/mo and the bld is worth $660k conservatively.

I was ok with a PI of roughly 50% of effective gross without a bank.  No commercial appraisal ($3500) origination fee, 5-yr calls or any of that.  Rents were under market because he hated turnover. The rents that were $475 in '05 are now $875 with simple updating (mostly flooring like laminate in living rooms) over the years.   

I still have the building and the seller is now 79 and happy.  We are friends and he sold me another house in 2015 also with seller financing.  Thanks for asking!

There are several triplexes in town that have been on the market for a while. I think it's been 9-12 months but there has been some sort of change in the MLS that has affected the area agents and the listings are all out of whack in terms of information. I keep running the numbers plugging in different purchase prices usually varying $5-$10k (and sometimes more) off the asking and while it has an affect, it doesn't seem to break the deal. I'm going to self manage and am using 10% for vacancy, maintenance, and CapEx. I'm trying to be conservative in my estimates.

So an idea I had was to see if I couldn't get the owners to finance. I'll pay them close to their ask in return for a low down payment (or none) and favorable interest rate. I'm focused on selling them on the idea that it's good for them. 

Can someone post a link to an agreement so I can see what the typical language looks like?

@Elijah Grant Great idea for seller financing! Following your thread and hope I can help where I can! 

Likewise...I am following too!

@Steve Vaughan Thanks for the numbers.  Love the adjust to prime after 15 yr great incentive that could potential benefit the buyer.  Who do you have draft the agreement?

Originally posted by @Greg Franck :

@Steve Vaughan Thanks for the numbers.  Love the adjust to prime after 15 yr great incentive that could potential benefit the buyer.  Who do you have draft the agreement?

If you mean the purchase agreement, I just use a standard MLS PSA that has a Method of Payment Addendum. Spells out the terms.

Most title co's have in-network attorneys that do these all the time. A note and DofT costs about $300 in my area. The attorneys and title co's are most familiar with realtor PSAs. A funky 'napkin' outline of terms will cost more.

Now I do them myself after paying for it a few times. Just did a Note and DofT today for a private lender who is refinancing me out of a bank commercial apt loan. Their adjustable rates and calls can stick it!

@Elijah Grant - How has this been going? What sort of steps have you taken towards your goal, and how have they worked out for you?

I'm going to get started in earnest looking to buy a new property this way.

@Steve Vaughan thanks for sharing your example. You've inspired me to find properties that I can be seller financed or subject to. I hope you don't mind if I reach out to for more questions. 

Elijah,

When starting out, sometimes it helps to do the most simple option first.  It gives you a higher level of confidence and prepares you for something a little more complicated next time.

Depending on if you are using the right bank to finance your deals, the most simple way to creatively finance a deal is to get the seller to finance your down payment.

You mentioned that you didn't have a plan for financing soon enough.  It really pays to establish a relationship with a local community bank well in advance of doing a deal.  When I first got in touch with the bank that has done nearly all of my deals, I cold called the commercial loan officer, introduced myself, and told him what my goals are.  He was more excited than I was!!  Some of these little community banks don't get nearly as much excitement as you might think.  One of the biggest mistakes beginners make is thinking that you have to have your hat in your hand before approaching a bank.  

Remember, to a bank, cash is a liability while loans are ASSETS-- totally the opposite of what each represents for you and I.  So when you go to them asking to borrow money, don't have your hat in your hand, just give them confidence that you'll pay your bills and that your word is good.  In my experience, the smaller the bank, the better.  Peter Lynch once said that if his ultimate stock investment would be sleepy back-woods bank in Louisiana that no one had ever heard of-- I've found the same to be true when looking for funding.

Once you have a relationship established, then you're ready to look for a deal. For a beginner, I would simply look for a motivated seller. I don't know the Iowa market, but I have found motivated sellers on the street and on the MLS. You just have to look.

For many situations, the banks will finance 80% of the deal.  Many times they don't care who or what entity owns the other 20% so long as they are the first lien-holder and they KNOW that they can get their money back if they are forced to repo.  So the question now is what creative ways can you get that last 20%??

In some cases you can offer to "pay" full asking price for the property, but ask for the seller to make a concession of 10% toward the purchase price.  That makes up half of your down payment right there!  It doesn't really cost them in terms of "real money" because it is coming out of the total sale price.  Asking for them to make a concession of 20% would be pretty difficult in most cases because the bank won't finance a deal where the appraisal comes in below the sale price.

Maybe you can get the seller to conceed 10% and then the remaining 10% he can finance to you for some percentage rate.  The last deal I did I paid $0 down.  The seller financed the whole 20% to me INTEREST FREE.  Did I pay a higher price for the apartment building?  Yes, absolutely.  WHO CARES?!  I bought it using someone else's money.  After I obtained control of the property, I started making money from the rent then used the rent to pay the 1st lien holder (the bank) and the 2nd lien holder (the seller).  

Hope this gives you some ideas and helps you!!

Jason

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