This is not a big secret, but I wonder why more people are not jumping at the opportunity to build their balance sheet with assets on contract terms? Here´s a recent transaction I personally did: I found a private seller in Indianapolis, IN who was looking to unload four of his rental properties. He was asking $40,000 cash for each property. They were being sold with performing tenants and management in place. They were netting over $600 each after taxes and expenses. The investment would provide an 18% net return on my $160,000 cash outlay. It was a good deal but I knew I might find better….it was nothing to jump at…..Yet! Here is where it gets exciting! I knew the properties were in a stable area, and there were city improvements planned around there, so I decided to review the deal a little further. As it turns out, the seller was looking to sell the four properties to pay off 4 underlying mortgages of $40,000 for each property. The seller was not looking to make any money; he was just sick of being an out of state investor and wanted to focus on other things in life!!! Better yet, the seller had secured financing on each property for around 4%, an incredible interest rate for anyone!
Sirens started going off in my head. What if I bought these properties on land contract using the existing underlying financing? It was worth a shot! I approached the seller and offered $1,000 for each property, and contract terms that mirrored the financing he already had in place. He happily accepted the terms and I was able to save my $160,000 of buying power for another deal. Better yet, even with the financing in place, after I make the contract payments to the seller, I still net around $1,200 a month on the deal! Not a bad return for having the foresight to offer to purchase on seller financing terms.
Here are a few quick tips to consider when evaluating a real estate deal that you may want to purchase on terms.
Always Ask: It never hurts to ask from the get go if they offer financing terms. I tend to ask the price of a property and then ask if the property can be bought on terms for that price.
Find out their Motivation: Just as our above example illustrates, you could very well buy the property you are interested in for cash, but if you learn more about their motivation for selling, you could gain some valuable insight that could open the door to buying on seller financing.
Let the name price and interest rate first: I would have been happy paying a higher interest rate in my example, but the seller made an assumption that the going interest rate was 4%. Letting him name the price enabled me to accept or negotiate better terms. I have been involved in many transactions where the seller has assumed they will be paid in monthly principle payments with no interest. It is always to your benefit to let the seller lead the negotiation process.
These are but a few quick tips to remember when buying a property on seller financing terms. Make seller financing your best friend as you accumulate assets and build wealth in 2011 and beyond!
Have a great seller financing story? I would love to hear about it….share it below!!
Photo Courtesy: Michael Pereckas