How do you convince a seller to do owner financing?

Question

I am just starting out in the real estate investing I have found some properties I think would be great investments for my first deal. The problem is I don't have the down payment required for the properties. I wanted to know if there are any suggestions on how to get a seller to consider owner financing rather than using a bank?

David Krulac · Answer

@Dewayne Askew

Not every seller is either open to seller financing or is able to do seller financing.  If it is the first your job is to explain seller financing in terms of how it benefits the seller.  How it benefits you is irrelevant.  It is not about you.  If the seller is unable to do seller financing, that might just not work for that "deal".

One thing you can mention is "What are you going to do with the money that you get from the sale of your home?"   If they say put it in the bank, there is your opening to talk about how you can give them a much better return than any bank.  Banks are paying from a fraction of 1% to maybe 1% or more on a CD, you can offer a much higher return.

Secondly, you need to brush up on capital gains tax code so that you can accurately inform the seller of the tax consequences.  You should be able to explain to them that by taking seller financing that they spread out their tax obligations over the life of the financing so that they don't have to pay all that tax at one time. It called "Installment Sale Tax Treatment".

Thirdly, you should explain how their home is the security for the mortgage and if you ever get run over by a bus that they would have the home as security and would benefit from that security.

I always say and have written here before, "To a man with a hammer, Everything looks like a nail."

There are a multitude of ways to buy a house other than seller financing.  The first 11 houses that I bought were all 100% financing and only one involved seller financing.  Not every house is going to be suitable for seller financing.  the first house I bought was from the state highway department, they would not do seller financing.  The second apartment building I bought was from a 6 heir estate, they would not do seller financing.  The third property was owned by a national relocation company, they would not do seller financing.  Finally at the fourth property, the seller did owner financing.  That was the only property of the first 11 that involved seller financing.

You can hear more of my story on Bigger Pockets Podcast #82, where I was the guest.  Give it a listen

Jake Thomas · Answer

@Dewayne Askew the easiest way is to just ask them if they would consider seller financing. If they don't understand what it is then explain it to them. You are not going to talk someone into something but rather helping them understand their options and let them make the choice if they will accept it or not. I find older retired landlords like to sell on land contract (Michigan thing). They prefer not to sell the property and cash out as it will increase their taxable income for that year and would rather still have the steady flow of payments coming in without the hassle of the property.

Jarred Dukes · Answer

Hi there. Keep in mind, essentially, you're in sales. Or at least viewed that way by the folks you're working with. And there's an old saying in sales, "you can lead a horse to water but you can't make them drink." I say that because you may be trying to fit homeowners into a seller financing situation. When instead try focusing on solving seller financing problems. For instance, a seller who wants more than what anyone will pay them. That's a seller financing problem. A seller whose house failed on the MLS. That's a seller financing problem. If they are willing to go thru a bank that's a listing brother and I would move on. Refer them to your favorite agent and collect a referral fee. When speaking to motivated sellers, find out what their pain point is first then if and only if the best option is they carry the note then present that as an option and leave it up to the horse to drink. However, if the issue is not having a down payment you never need a down payment. I never use my own cash to buy deals unless you don't like your money. What I would do is find a private lender (your already on Biggerpockets.com so start there), let them in on what you're trying to do and have them finance the capital you'll pay the seller secured by the seller's property after contract is signed. Then find a tenant and, with the cash flow, pay the lender. Cheers. Hope that helps.

Grigory Pekarsky · Answer

Here are three tips for how to convince a seller to do owner financing: -  1. Have the right motivation: If you're interested in an owner financed deal, ask yourself why this is important to you and what's motivating your desire for it. For example, someone who wants a flexible move-in date might find owner financing attractive because it gives them more options compared with other types of deals. On the other hand, someone who doesn't have the credit score to get a bank loan would probably not be able to get into a home without seller financing. 2. Figure out if it makes sense: You need to do your research and run the numbers before asking a seller to finance their property with you as the buyer. Make sure that doing so will help you achieve your goals and that no other method would work better for you in this situation. You want to make it beneficial.  For example, perhaps the seller wants to sell quickly but you'd like time (a closing date several months away or even another year) to save up for a larger down payment. This will give you room to work and help you achieve your goals.

Owner financing can be an excellent way for people with lower credit scores to get into a home and begin building their credit history , but doing so requires some extra effort on both sides: You'll need to convince the seller that owner financing is in everyone's best interests, while ensuring it is beneficial for you as well.

Brian Gibbons · Answer

you are in TN

I would get a re license and learn

Sub2, lease options, lease purchase, wrap purchases, land contracts, JVs w sellers on minor rehabs, private lender marketing for rehabs, JV for credit partners

Then look or market for problems

I like  expired's, canceled listings, and long days on the market listings

Solve the problem by showing them a couple different solutions,

Joe Villeneuve · Answer

Follow the money.  Show the seller a comparison between selling conventionally and using seller financing, and how the end result both now and continuously is better for them.  Don't forget the tax implications and especially the added income to the seller coming from the interest the buyer is paying to the seller instead of the bank.

Chris Seveney · Answer

@Dewayne Askew

I would strongly advise on investing in real estate with no downpayment and no money

Save money then buy.

Dewayne Askew · Answer

Thank you @David Krulac this was excellent information and a great starting point also I will also listen to the podcast you recommended to see if more information is available there as well.

Bill Gulley · Answer

Land contracts or contract for deeds have new issues after the balloon popping and applies to all states, circumventing required foreclosure laws, etc. you can search BP for such threads.

It's always best to use a note and deed of trust or mortgage than installment agreements, especially if you'll be doing repairs.

Sellers will want something down, few pay to allow you to take a property. 10% has been customary but they may want more.

Sellers of a primary residence usually won't have tax issues, landlords will and they defer income as received, they also get hit with 25% of the depreciation after settlement, so they need some cash.

To increase a down payment you can make higher payments in the beginning and after you hit an agreed point the payment is reduced to the amortization agreed.

Thing is, the seller makes more, you're paying a rate that is higher than they can get from an alternative investment. $$$$

As a buyer, you can be responsible for what you get a property owner into doing financing, better ignore guru stuff like zero interest or unconventional terms......that means you need to know what customary financing transactions are in your area and the laws applicable to  your deal. Either party can be the "predator" in doing something off the path. :)

How do you convince a seller to do owner financing?

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