Why should a seller offer financing with no money down?

Question

Being a new investor with absolutely no money in my bank account, I am very interested in the prospect of Seller Financing. I have read that it is usally much much easier to work out a financing deal with a property owner rather than a bank, especially when you are looking to buy mulitifamily properties (which I intend to buy). My question is, how can/should I try and convince an owner to finance to me when I have no money down. I know this is a very common question. Everyone wants to do a deal with no money down and blah blah blah. But, I am being serious. What can/should I offer instead of a down payment in order to incentivise the owner to actually financing their property to me.

If you have any experience making offers to sellers with no money down, what did you offer? How did you add value or convince them that doing a deal with you without recieving any money down would work for them. I am very interested in not making this a one-sided deal (i.e. I want your property for nothing and you should thank me for taking it). I want to create a deal that satisfies both my need to get the property with no down payment and the sellers need to feel they have made a good deal.

Also, if you are a seller that has financed to someone with no down payment, what did the agreement look like? What did they offer you? What were the terms? Any relelvant info would be extrememly appriciated!

Paul Williams · Answer

Robert, I own a commercial building that I want to get rid of big time.  I don't know how your seller will respond to the request for owner financing, but in my case, I would be certainly entertain owner financing this property to a buyer.  As an advantage to me, I can probably get a higher sale price when offering owner financing, and if I can get a down payment, even better.  After a year or two, I could even sell the note if payments are made as scheduled and cash out, or if the seller is doing well,  I can keep the income from the payments.  It looks like Wendy Patton has some good info, and a lease option might be the best option for everyone involved.

Tom S. · Answer

@Robert Ferrell  Do keep in mind that purchasing and owning a property still requires a good amount of cash.  Even if you buy it no money down, there are still closing costs, insurance and utility downpayments, taxes, etc.  If you're renting it out, definitely set aside reserves to operate the business.  Just to close on the property, figure $2-3k, and I'd side aside at least $5-10k total to handle any surprises that pop up with owning a property.

- Tom

Paul Williams · Answer

@Robert Ferrell Just a word of caution that kind of bit me with commercial- Commercial doesn't rent out as quickly as residential does, at least it didn't for me.  I have enough experience with SFR's that I thought I could make a really nice profit on buying commercial properties and then renting them out right away for more than the payments.  Commercial can go months without any inquiries.  I bought 2 commercial properties near the same time, and one of them didn't have any serious inquiries for about 6 months. Then someone called and asked if I'd be willing to sell it, which is funny, because I had it listed for sale or lease.  They didn't see the listing, but they drove by the building and liked it.  We sold it 2 months later, because they wanted environmental surveys and other things done.

My second building I bought 2 years ago and have been waiting for a buyer or tenant ever since.  The holding costs for a few months is bad enough, but going 2 years is really aggravating.

Just make sure you have some kind of plan and maybe a backup plan for the property, or some way to back out of the deal if you need to. With commercial, it is common for a landlord to sue a tenant that moves out before the lease expires for the entire amount of the lost rent for the remainder of the lease and win. I've heard of a number of these cases, and they tend (at least in TX and IN) to be an easy win for the commercial landlord.

Wendy Patton · Answer

Hi, Robert! Have you heard of lease options? Check it out!  http://wendypatton.com/leaseoptions/lease-option-s...

However, be sure to check with what is permitted in your market when it comes to using one of these deals. Hope you find it helpful. Best of luck to you! -Wendy

FR W. · Answer

@Wendy Patton Hi, Wendy! I clicked that link you shared for the download, but when I entered my email and hit the button, nothing happened.  Thoughts?

Tom S. · Answer

@Robert Ferrell  Typically closing costs are split between buyer and seller, but everything is Negotiable!  However you'll definitely want to hire a good attorney to draw up the seller financing docs.  Hire an appraiser too to make sure you're not overpaying for the property.

Yes, the cash flow from the rental helps, but you need to be prepared.  What if you close and then the tenant doesn't pay you right from Day 1? Then you have to file an eviction notice and you're not receiving rent too.  Or your insurance company requires an inspection at closing and items like hard wired smoke detectors need to be installed ($2,000).

I've been in the rental business for almost 15 years now, so just saying things pop up and you have to be prepared.

Good luck!

Robert Ferrell · Answer

@Wendy Patton Your presentation was very interesting. Let me know if I am understanding this correctly. For example A seller has a home listed at 100k, I negotiate a lease option deal to buy the house for let's say 95k in the next 5 years. In order to solidify that option, I pay them a fee of lets say 1k. Now I am in charge of that property for up to the next 5 years, which means every month until I can find a new buyer, I will be making the monthly lease payment to the seller? But, once I find an interested buyer I can offer them a lease option for a shorter amount of time, say 3 years, and now their monthly payment will cover the lease and hopefully they will excercise their option to buy, in which I would sell the property for say 110k? So my purchase price is 95k less 1k for the option price plus however many lease payments I had to make before finding a new person to offer a lease option to, then subtract closing costs and what is left would be my profit?Please let me know if I am understanding the process correctly. Thanks!

Robert Ferrell · Answer

@Tom S. Aren't closing costs paid by the seller? If not though, is that something that could be negotiated into the purchase price kind of like a warrenty is stacked onto a car loan? Also, I would be planning to rent out the building, so would relying on cash flow be sufficient to cover that 5-10k surprise cushion?

Jeff Rappaport · Answer

@Robert Ferrell, one of the things you are looking for to get someone to finance with no money down is debt relief!  Is the property vacant and costing them money every month? Is there little to no equity in the property preventing them from listing it without coming out of pocket to get the property sold?  It is really about motivation!  No money down can also come in several forms.  I just structured a home with owner financing with $8,000 down and am selling it with $28,000 down.  The $8,000 did not come from me so in essence I structured a no money down deal.

Listen to @Wendy Patton when she suggests making sure you know the rules and laws in your area.  Owner financing is great but you need to make sure you aware of all the pitfalls.

Why should a seller offer financing with no money down?

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