How to find or create owner-financed deals in a seller's market?

Question

I am looking to buy and hold in my area (Colorado).  However, the area I am in is a big sellers market.  My neighbor's house was listed at 3:30 yesterday, has had four offers and one or two were above asking price.  Comps show it to be valued lower than asking price.  I don't think I will be able to get any houses once they hit the MLS, since inventory is so low and houses are selling quick.

Besides trying to find houses BEFORE they hit the MLS, how can I compete with buyers who seem to have boatloads of cash?  I can offer a quick exit for the seller, a small down if necessary, but what else can I offer to make it worth their while to sell to me?  Any advice/comments welcome!  Thanks!!

-Julie

Bill Gulley · Answer

Julie, I suggest you add to your list old, tired, worn out landlords, most will retire someday and seller financing provides annuity income and tax advantages to them, especially if they have held properties for decades.

It's the best source for picking up properties with SF and often you can negotiate an entire portfolio of rentals. Usually you'll find that these owners have properties paid off which makes for a clean and safe SF deal.

You listed estate sales, sort of, but look to trusts holding RE, most trustees don't want to manage RE and holding RE requires annual valuations and accounting functions that drive up costs and administrative oversight. You can solve that issue by converting RE to a note held by the trust, to them is it much like holding a bond or annuity.

I never used direct mail, never needed to, I used the phone!

Many of the market tactics you mentioned may not constitute a problem for an owner, especially in a hot market. Having a baby may give motivation but they can simply sell for cash and use it to move on, so it's not such a good seller finance lead.

Title problems and property conditions that keep properties from selling are targets, if you can solve those issues. Title issues can be taken subject-to the issue and that may give you the time required to solve the issue.

Property conditions are obviously a targeted market, properties that have been listed and haven't sold may have such issues. You can buy "as is" and begin the rehab.

Contractors may take a note to defer gains, trading properties may allow the contractor to assign gains to the home taken depending on how they account for the sale and credits allowed. You might consider introducing a program to new home builders to accept trades and purchase all they take. If you're in a hot building area such a program can generate a steady flow of properties for you.

That ought to keep you busy! Good luck :)

Bill Gulley · Answer

Welcome to BP Rhonda!

I'm not Adam, but say you have an investor asking 50K for a property that rents for $600 a month. The seller knows that no more rent can be charged successfully.

You offer 40K, with 10K down and carry the note of 30K at 12% amortized at 36 months, the payment is $949.24.

The seller knows the property will never generate 900 a month and that this new guy will be in a negative cash flow taking 350+ out of pocket each month. The seller may see this as a big mistake by the buyer and accept the deal. His greed is the down payment and the 12% interest and thinking the loan won't fly that he'll end up taking the property back keeping the money paid and selling again.

Surprise, you can easily afford the additional payment being made to equity. The tenant pays the 300 in interest and contributes to paying down the note. In three years you own it free and clear.

The reason the seller took the 10K drop in price was based on his thinking he'd get the property back, his greed bit him. You got a property in decent shape, rent ready at a 20% drop in price. You end up with a 50K property with about 22,600 out of your pocket along with you contributing management at no return for 3 years, perhaps throwing some in for maintenance, taxes and insurance you're into the property at about half the asking price, depends on how you look at it. :)

Todd Plambeck · Answer

Why would anyone ever sell you their house with seller financing?  That's the question you have to yourself.  I believe there are three main groups that fall into this area.

Bill Gulley hit on the first one, old tired landlords, who can see the benefit of doing a seller finance deal to remove the headache of dealing with their properties.  Love using the term "annuity", conjures up visions of a never ending stream of cash flowing in.

Second, people who have too because of financial distress.  However, a small segment of those with distress are probably going to be you best targets.  Those are the people with little to no equity or are upside down and probably bought their house between 2004 and 2007 at the peak of the market.  They have to sell and probably can't come up with the chunk of money for repairs, closing costs, or realtor commissions.  This should be your prime target.  No equity means cash buyers can't buy them at a discount and they can't use that equity to pay the selling cost through the conventional sales channel.

Last group, lease options.  A lease option is far less scary to the seller than selling it to you where you take over their existing financing.  They still own it, they get the tax benefits, and you have control of the property, are building equity, the owner is still responsible for maintenance, and you are getting some cash flow from the tenant you sandwich in there.  You ought to be calling or emailing every for lease or FSBO ad on Craigslist asking if they would do a lease option.

Rhonda M. · Answer

Adam - can you give an example with real numbers about how you "work a sweet deal"?

Adam F · Answer

About 8 years ago one of my employees was telling me about a former employer who owned a self storage facility. He sold it 5 times before it finally stayed sold. Each time he sold it he carried the note and required 20% down and charged 7% interest. His strategy was to find investors looking to buy with questionable safety nets and unrealistic expectations. He was effectively betting on them defaulting within a few years and reclaiming the property, which he did - over and over again.

I've used this same strategy in reverse, make the offer so sweet they can't help themselves at the prospect of taking your down and reclaiming their money. I provide no financials and I'm young so most people assume I'm foolish. We setup short term ammoritized notes that pay off in 2-3 years with large payments and they just cant help but take it .. It's greed. And it's worked to the tune of 2-3 deals a year for the past 6 years. We buy 2-3 a year, and pay off 1-2 a year.

Walt Payne · Answer

@Julie Cadman you need to target each group with a mailing that touches on their pain, and offers a solution that motivates them to contact you. Mail  about once a month to each, and keep mailing to them for 6 to 8 months.

The best way is to buy mailing lists. Do split mailings at the start, and keep track of what works. Try to only do one thing that is unique per group to help isolate what made that one successful.

Also look at calls vs. closings. A lot of calls that don't close means your message may not be right yet. In an ideal world everyone who calls will be ready to sell to you.

Above all keep at it. Direct marketing is all about exposure. I have heard many times from many people that good advertising all boils down to getting the right message in front of the right people, at the right time. The more often they see see your message the better the odds.

Brian L. · Answer

The best way to compete with the retail buyer is to go after the off market stuff. You have to market directly to home owners in my opinion. There are still people in our area that are making a buck off of MLS deals but they tell me its not easy. If you have MLS access you may be able to find deals before they hit the retail buyer and make like 100 offers a weeks or what ever. If you're just going after homes on real estate websites then you're competing with everyone else and I don't see any deals there.

Adam F · Answer

Bill more then adequately explained my strategy.

I recently used this on a commercial building that went from a 200k to 130k price drop last year on a 2 year note. I also used this on an industrial park that went from a 600k to 450k price drop on a 3 year note. The down is about 20% average or more to do this. Note and trust deed, and do payments based on 30 yr term w/ balloon, average interest is about 6%. Fix what needs to be fixed in the term and then refi.

Bill Gulley · Answer

Adam, generally we are more concerned with predatory lender'/sellers, but there are predatory buyers as well. I've done many deals where I knew a seller was thinking they were going to "out smart" me, didn't happen, you can certainly play on a seller's greed, more like reflecting their sinful nature back at them. I see no issue with dealing with someone on their level, playing the naïve buyer is just a negotiation skill. Some call it playing hard ball, all is fine so long as the buyer and seller are on somewhat equal footings. In any transaction, one side will be seen as getting the better end of the stick, predatory dealing is dealing from unfair advantages or intentionally taking undue advantage. :)

Bill Gulley · Answer

Good point Todd, but I'd prefer title to a lease option, but you need to do what the market and situation demands, that's not saying every property you come across has to be turned into a transaction. Potential profits should guide you as well as the situation and market. :)

How to find or create owner-financed deals in a seller's market?

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