How and where investors can find a seller carried creative financing transaction

[AJ Wong]

One tool I've utilized extensively for personal and client acquisitions are seller carried transactions. 

Oregon has proven fertile land for sellers with low capital base and reasons to consider seller carried financing. I reckon I've personally acquired a least three properties on seller terms and have assisted at least three others in three years acquire properties with favorable seller financing. 

Normally I attempt to structure the transactions utilizing an interest only 3-5 year ballon payment (balance due in full). 

For example: If a property is listed at $1M, typically sellers will require a minimum of 20-25% down but not always. An offer (on a difficult to sell or finance property) might look like:

$875k Sales Price with $175k down. (They might want more since RE commission costs to seller will be +/- $50k) 

$600k LA at 5% interest only for 5 years = $30k/year interest income X 5 years = $150k interest income. 

Plus the original $875k = $1.025M Gross to seller. 

Closing costs on seller carried transaction are marginal, payments are collected and preferably administered by a third party and qualifying or documentation required is discretionary to the seller. Like most 'banks,' usually sellers will want to see: Income, credit and assets. 

One component for investors to consider is an exit strategy. How will the seller be paid off when the balloon payment is due? 

Can the principal balance be satisfied with income from the property or will a refinance be required? Having a private party as the lender also offers more negotiability, I've found many private parties willing to extend terms with either bulk installment payments or a higher rate of return. It is easier to approach a personal party with individual needs than a stringent lender with guidelines.

Seller carried transactions are not always the most favorable option. For example many seller might require 3-40-50% down or a shorter amortization loan (as in 10 years.) Most likely if the asset is investable, there are conventional mortgage or loan options available. For commercial asset classes, local credit unions can often be an excellent resource for more complicated or unique property types. 

Here in OR you'd be surprised what local credit unions will finance, and although the rates might be quite as low, or amortizations as long (usually 25 years or remaining useful life of the property) they can offer more permanent mortgage solutions. 

When structured favorably, seller carried transactions can offer lower down payments, below market rates and terms and improved cash flow and cash on cash return. Here are some things to look for when identifying seller carried candidates: 

- Low base for seller (They have a longer ownership duration and or acquired by inheritance, as part of a business or capital improvements offset by income.) Either they invested a long time ago, or they have business that has paid for the development of the asset. If the owners purchased very recently or invested a bunch of money into the property it will be unlikely they will accept a lower down and an extended repayment period. 

- Little to no existing debt tied to property. Owners cannot accept less down than they owe unless they are willing to come up with the difference. This almost never happens. Ideally, the seller has no existing lien balances against the subject property, so that the down payment (less expenses and commissions) goes directly to their bank account. If for example the seller owe's $300k and the buyer has $300k to put down, the sellers lien would need to be paid off and closing costs and RE professionals paid before the seller could move into the first lien position as lender. 

- Seller is a business person. I've had the best experience with sellers that are successful in business. There are certainly exceptions to this (as in the opposite of neglected assets) but overall if a seller is in a position to play lender, they have business acumen. Seller carried transactions can be hard to comprehend for real estate professionals, and even more difficult when being relayed through potentially 4-5 parties. 

- Allow time for consideration. As stated, seller carried transactions can be complicated. Not so much in actual terms of the deal (although that can be intricate also) but for the effects on the seller and/or their portfolio. The larger the transaction (or balance for the seller to carry) the more likelihood there will be other parties ie: attorneys and accountants that need to 'sign off' on the deal for the seller. 

- Types of assets with common seller carry potential include SFR's, Multi family (small balance) complexes, industrial or warehouse space, RV or Mobile home parks, storage facilities and vacant land.

Have you ever utilized seller or private financing to secure a property?