There are so many different ways to invest in real estate. You know that, and I know that.
I’m in the residential finance world so the types of deals that I see are usually the types of deals in which there are Realtors involved. When Realtors are involved, properties are typically listed on the local MLS by the listing agent, and a selling agent represents the buyer. Most deals structured in this fashion are owner-occupied purchases, but there are still plenty of deals for investors out there, and they happen all of the time.
Today, I want to give you an example of a purchase strategy that is sometimes used by the best, most creative selling agents in conjunction with mortgage professionals who think outside the box. This strategy is generally used for owner occupied purchases. I’ve seen it used only one time by a selling agent who was representing a buyer for the purchase of an investment property.
(Side note: I think that it could be applied to traditional financing investor deals much more so than it currently is.)
How to Analyze a Real Estate Deal
Deal analysis is one of the best ways to learn real estate investing and it comes down to fundamental comfort in estimating expenses, rents, and cash flow. This guide will give you the knowledge you need to begin analyzing properties with confidence.
What is the Seller Buy Down Strategy?
The selling agent needs to be top notch and on top of their game in order for this strategy to work. The selling agent must be a master negotiator to make this special strategy a reality for the buyer.
The special strategy works great for buyer’s markets — markets in which there are more sellers than buyers. That is to say that there is more supply than there is demand. That is NOT to say that it wouldn’t work in a seller’s market, it’s just harder. A buyer’s market works best because buyers typically have the negotiating leverage. A seller may only get one offer on their property, and it may take a long time to get that one offer.
So, without further ado, here are the meat and potatoes of this special strategy. It’s called the Seller Buy Down, or SBD for short.
The whole idea for the SBD is to get money back from the seller to permanently buy down the interest rate. Most agents will try to negotiate to get money back from the seller in terms of recurring or non-recurring closing costs, but most don’t try to get the money to actually buy down the interest rate. Keep in mind that an agent should get as much back as humanly possible to help the buyer get in the property.
The majority of agents and mortgage professionals will distribute the seller funds to underwriting costs, escrow fees, and loan fees…not many of them think to permanently buy down the interest rate on the loan which significantly reduce the monthly mortgage payment as well as turn non-cash flow into cash-flow.
A Look at the Numbers
Let’s take a look at the numbers for a seller buy down, and then I’ll explain some of the nuances and benefits for everyone involved. In this example, we’re assuming the buyer to be putting in an offer to purchase a $300,000 house. The property has been on the market for a while, but the seller may not be willing to budge on the asking price (or maybe they can’t because they’ll break even with at this price).
The investor (buyer) has $60,000 to put down on the property, and this is the only property on the market worth buying to turn around and rent. The trouble is that a low ball offer would work, but it’s not likely the seller will lower the asking price.
The interest rate that the buyer will get with no SBD is 4.0%. If the selling agent is able to negotiate just $10,000 toward the SBD, then the interest rate will be bought down to 3.25% on the 30 year fixed mortgage.
Full Asking Price Offer
|Low Ball Offer||
Full Price Offer w/ SBD of $10,000
Take a look at those numbers closely. As a buyer, you always want to get the lowest price possible, but that’s not always the case. As stated above in this example, the seller just cannot lower the price to the point where you can get in the deal. So what do you do? You do the SBD. As it turns out in this example, the benefits are many for everyone involved:
- The seller is able to get full asking price for the property. Even though the net price they will get is $290,000, this actually helped the buyer qualify for more money to get into the property by reducing the interest rate. They essentially spent $10,000 to save $15,000 — and saved the deal.
- The buyer is able to use the seller-paid closing costs to buy down the interest rate to 3.25%. Instead of a monthly payment of $1,145 per month, the buyer saves over $100 per month because of the rate buy down, even though they came in at full asking price. This SBD strategy could turn the deal from something that doesn’t cash flow, to one that does.
- The listing agent is happy because they brought in a full price offer. The listing agent gets their commission based on the $300,000 and can put a couple of extra dollars into their pocket.
- The selling agent is also happy because again, the actual price is $300,000, and they too get a slightly higher commission because they put the deal together.
In the end, the whole reason this borderline deal works is because of the cost of money. The lower the interest rate, the less one is going to pay on the same amount of money.
How to Make it Happen
Here are the steps that I would take in order to make this happen for you as a buyer of residential real estate in the investment capacity:
- Find a mortgage professional in your area. Let them know that your Realtor will be working the Seller Buy Down strategy. If they don’t know the term right off the bat, find a different professional. Most outside-the-box thinking mortgage professionals should know and understand how the SBD works.
- Get pre-approved to purchase the property with traditional bank financing. See my article on how to get pre-approved and what to expect.
- Find a selling agent (buyer’s agent) who “gets it.” No, seriously. You need an agent who gets what you’re trying to accomplish. A math-savvy Realtor or maybe a former financial professional would be a great place to start. You also need one who’s a master negotiator so check references to make sure they’re good to go.
- Find a property where you can make the numbers works. Again, in a buyer’s market, this strategy works like a charm. In particular, look for properties that have been listed for an extended period of time. These are the types of properties where you can negotiate. Combine a low ball price WITH the SBD and you’ve got a smoking hot property to make the numbers work.
Finally, make some offers using this strategy. Use it for your primary residence, your vacation property or second home, and definitely use it for your investment properties. After all, the worst the seller can say is no.
Have you ever used the Seller Buy Down strategy? If not, why?
Submit your questions and comments below.