The psychology behind "seller real estate financing."
There is perhaps no better indicator of market shifts than seeing the famous words “Seller Financing.” Interesting enough, I have seen 3 deals just this week that are being offered as seller financing. Needless to say, these seller financed properties during a balanced market tend to sell very quickly requiring buyers to jump at the opportunities. As markets shift into full swing buyer markets they may sit on the market a bit longer and affording you a better time to do your diligence. Either way, real estate investors love seller financing and you never ever want to skimp on this diligence time.
You may be quick to tie up the property with a refundable deposit so you can then do your proper diligence. Don’t fall into trap of non-refundable deposits. If the property has merit they have no reason, in my book, to have non-refundable deposits.
Investment real estate is a tight community
Often referred to as the “Good Ole Boy’s Club,” real estate investors know other real estate investors. You do not want to be one of those people who tie up property and then cancel for reasons other than the property proved to be a bad property. Changing your mind or the inability to come up with cash to close is a big no-no. Your name will quickly be blacklisted within the real estate investing community and you want to be branded as an investor who closes on their deals.
Structuring deals using seller financed properties are many investor’s deal of choice. This is where a seller owns a property but does not have a loan on the property or perhaps just a small loan balance. This gives the flexibility for a seller to act as the bank and instead of paying the bank, the monthly payments are paid to the seller. But why would an investor be interested in seller financing and where do you find these seller financed properties.
Simply stated you look for them, or simply ask. During Buyer’s markets they are more prevalent, which is why these deals stood out this week, but often people do not openly offer or market seller financing. Most people prefer to cash out when they sell. When we are lucky we encounter those investor minded sellers who prefer it but often it is our opportunity to find them.
You rarely get seller financing unless you ask for it. You have less than a 50/50 shot if you do ask. Let’s face it, if it were easy everyone would do it. It is not difficult, however it does require a bit of effort and diligence on your part. But this effort is rewarded big-time. To be a successful investor you have to be able to look for and offer up a win-win for both parties.
Understanding the sellers benefits
Knowing the benefits of seller financing allows you to better search them out and find them. It also helps you to know the sellers motivations which allows you to structure deal that create a mutual win for both parties. Additionally if you understand the benefits of seller financing it helps you to convince a seller to actually sell you their property as a seller financed property even if it is not originally offered up that way. You can be the hero who come in and offers them a deal that is good for both.
The Investor who retired in Hawaii:
I am reminded of Stan, an investor who was in his late 70’s and wanted to move to Hawaii and retire. Like many Investors who sell with seller financing, they originally invested for the reason of getting monthly residual cash flow checks. Then at some point in time they move away from area or want to retire and get out of the business. Their motivation to sell may have arrived however the motivation for these monthly checks rarely ever dis appear. Selling a property with seller financing allows them to continue to get these residual cash flow checks and allows them to remove themselves of the daily management of the properties. Selling a property in this fashion is a way to continue their cash flow as well as physically remove themselves from the investment. As great of a tool this is not all sellers even consider this. However as a savvy investment buyer who understands these benefits you can often make these deals happen.
Part of being a savvy investor is the ability to create win-win deals. The art of the deal is drafting a solid deal and then selling the offer to the Seller.
Sellers Benefits of seller financing
Sellers get a monthly residual check in the mail.
By deferring the lump sum money S/he was not subject to large capital gains that would appear if they cashed out all in one shot. (this often proves to be this seller's hot button)
S/He not only receives the purchase amount of the sale of the property, S/he also receives the interest on the loan S/he gave. This results in continued cash flow for seller.
The seller’s risk are mitigated as they are essentially the lender and therefor have the rights to foreclose on the property if you default on the payments. So they get the deposit money, any payments received as well as the property back, so they are protected just as any lender would be.
Buyers benefit to sellers financing
· Unlike a bank loan that can cost 3%+ of the mortgage, a seller financed loan does not incur all these cost and therefore your out of pocket expense is much lower.
· As you acquisition cost are lower your cash on cash return is higher
· You get a property that you can add to your asset sheet but that does not show up on your credit score which can hinder future loans
There are countless reasons why a seller would be interested in doing a seller financed deal, but you have to look for the win and most importantly you have to ask. Many investors who are reaching old age no longer want to deal with the headaches of property management or even managing the properties. They understand your motivations as an investor so they are open to creative deals.
There are many people who inherit property from parents who live in another state and they simply do not want to deal with it. Make it easy for them to do financing for you.
Other homes may not be suited for a loan due to deferred maintenance and the house will not qualify for a loan. This is perfect for the person looking for a value play.
Look for the win and ask for the deal.