talk terms . . . when someone is open to seller financing

[Christina R.]

I know this topic is discussed at length but maybe a few a willing to say what they would offer up for the following situation:

SFH, owned free and clear

2 apartments - one up, one down 

2 beds, 1 bath, kitchen, living room in each

currently rented for $800 each

market rent is between $1000 and $1150

I have not seen the inside condition of the property yet

Similar "as is" sales on the MLS in the area are right around $200K

I'd like to approach this one from a TERMS perspective instead of the overall price of the property.  Let's say this one needs 20-30K to get both units ready to rent.

How would you start negotiating with the owner?

Thnx in advance!

[Bill Gulley]

I'd like to buy the property Mr. Seller, but let me ask you, would you reconsider holding the property if someone would pay for all the maintenance, take care of all the leasing, cleaning, advertising, paid the insurance and all operational expenses where there was nothing left for you to do but get a check to deposit to your account, would you stay in the property?

Doesn't matter what the answer is, yes means they want an annuity income and don't mind still being connected to the property. If they say no, they want to be rid of the ownership and if they are saying, I need cash, then go that route.

Mr. Seller, if I were to pay you X dollars and buy the property, you know what you bought it for and how much you depreciated for taxes. You probably know that the profit you make will be taxed and you'll be paying a chunk of your profits to the IRS. Would you be more interested in keeping those profits under your control earning interest for you?

I never heard anyone say no, I want to pay the IRS!

Well, if I were to pay you X dollars, and you paid the IRS their cut of your money, what would you do with money left over, you could invest it or put it in the bank, what do you think that would earn for you?

Take the seller to their opportunities or requirements, you just reduced the cash they will have to work with, they may be losing a third of their profit and any reasonable investment can't compete with seller financing using all of their profits.

If cash is required, say a medical bill, explain that you can arrange that at less of a discount than they may lose by paying taxes. The payments due under a note can be sold to obtain cash now that may be required. Later on, payments can revert back to them still receiving interest on the balance.

Another solution for more cash is to borrow the money needed using that note as collateral, they will still be earning a higher rate than they pay to a bank.

Point is to learn what the needs are of the seller, meet those needs, structure the note to meet the needs over a longer term, doing so will be the greatest financial advantage for the seller.

I usually set the terms, structure the deal around the circumstances at an advantage to the seller than selling for cash at their asking price, that is to say, the deal is better than what they were asking for initially over the term. I never imply I'm paying full price, I simply show that after taxes and interest earned will be their best option.

Once they see the benefits, then move on to the price, never pay more than what the property is worth together with what you costs would be to take alternative financing and settlement costs.

They have already agreed to finance the deal, at whatever that deal might be, that should come before an offer price.

If you can only buy with seller financing, you have determined up front how the deal will be done. If you go to price, you may have time and expenses, property due diligence, inspections and negotiations, if you put a seller in the frame of mind they are dealing for a cash offer and then you spring seller financing on them, they are less likely to accept as they had been dealing from a different perspective.

If they just refuse to carry back, you haven't wasted your time or theirs, just move on and say next. But, IMO, most landlords like to keep more of their money working for them, they are accustom to monthly income. As to other uses for their money, investing in something else, I may ask them what they know about that other investment. Often you'll hear CDs, I love CDs, they lose the holder money after inflation more often than not. It might be Apple stock, fine, how well can they predict the future of stock prices and risks? Then I remind them that no one knows the real estate they are selling, they know exactly what sits there. Banks never know their collateral as well as a seller financing a sale! So, they have a known aspect as to risk.

I always make a comment, at some point, "I can refinance this or sell it after it's improved or take on a partner if anything ever goes wrong, just don't want you thinking you'll ever get this property back, when we buy, the deal is done" or some assurances such as that.

As you negotiate price, you're stressing the money needed to make improvements and repairs, point out that you will have skin in the game, that you're not in business to lose money, that you don't work for nothing, simply to reinforce the unlikely event of default, that come heck or high water, they will get their money.

That should spark some ideas on how to approach your seller, don't forget that the seller must have confidence in your abilities, so your RE education is important, don't be a know it all, but you can drop tid bits that let a seller know that you know what you're doing.

BTW, the chance of getting some form of seller financing on a multi family is much higher than a SFD, the owner knows financing can be tough. They also perceive a seller financed deal as getting them a better price, so justify the value of the building and don't let them sell you the possibilities of income, for a buyer, claims of income are almost irrelevant, so don't negotiate possibilities, just buy the dirt! Good luck :)