Seller financing - what's your experience?

Question

My husband and I are looking at buying a 4-plex from a friend and would like to present the option of seller financing. I'm a little worried as this is a friend and I've always been warned about the problems of doing business with friends and family. I would love thoughts from people experienced in seller financing or anyone who has done business with friends or relatives. Thank you!

Tyler Gibson · Answer

@Tairsa Mathews I can't speak to the seller financing but I can speak to the working with Family/Friends portion. I have done 2 deals and both of them involve my father in some way. The first was a SFH home that I wanted to buy but didn't have enough Cash to get traditional financing. So I got a private money deal from my Father. The first thing he said to me when we started talking about it was "I'm not doing you a favor this is a business deal". It is a good deal for him because he makes interest on his money and the loan was secured by the property with a deed of trust. He and I both understood that If I don't pay him he will foreclose on the house.The Second deal we are partners on and again we both went in understanding this is business. We put our agreement of how the business would operate and the terms of the deal in writing. Put it on paper so that you both have something to look back at and know that you both agreed to the terms. I have some family I would not be comfortable doing a deal with because I don't think they have the emotional temperament required to compartmentalize the Family/Business. I hope that my thoughts on the matter help you come to a decision about doing business with friends or family.

Tairsa Mathews · Answer

@Nicholas Aiola I will look up that blog post. Thank you for your comment, it was super helpful! We'll have to sit down with the seller and talk about his goals to see if we can find something awesome for both of us.

Tairsa Mathews · Answer

@Tyler Gibson thank you! That is great advice!

Grant Rothenburger · Answer

@Tairsa MathewsI have some small experience with seller financing. When I bought my first house, I bought it from someone who owned it through seller financing (land contract). Long story short, we paid off the original owner and bought the house. The person who was paying the land contract just wanted out, didn't care about losing equity.I've also never done business with friends or family, well not in real estate.

Nicholas Aiola · Answer

@Tairsa Mathews I actually just published a blog about this topic today. To echo @Will Gaston a seller-financed transaction could offer many benefits to the seller, such as:- Spreading out the tax hit over a number of years. Capital gains via the installment sale method are taxed when payments are received. - Providing the seller with an immediate investment in a secure asset with steady returns. If the seller is not sure what he/she wants to do with the money and doesn't need it immediately, this is certainly better than sticking it in a savings account earning 1-2% interest. also, because of the deferred taxes, the seller is able to earn interest on a higher amount of cash.You should find out what the sellers' situations ara in terms of how much debt is owed on the property, what their plans are for the money, how proactive they are about saving taxes, etc.With the right sales pitch in the right situation, this could be a home run for both parties.

Tairsa Mathews · Answer

@Cody L. Haha, that's kinda the way I'm planning on going at it. Glad I'm not the only one that thinks that way. Thanks again!

Cody L. · Answer

I didn't read anything. I just learned the same way I learned to walk. A few bruises by now I'm running.

Tairsa Mathews · Answer

@Will Gaston thank you for this!

Tairsa Mathews · Answer

@Cody L. Thank you so much! I'm still really new to this and the opportunity has come to us before I've had a lot of time to study seller financing. I'm currently reading Brandon Turners book on investing with no and low money down. Do you have any other resources you'd recommend that were helpful with this particular strategy?

Will Gaston · Answer

@Tairsa Mathews I think it can work out great for both parties as long as the details and risk is explained well on both sides. It can lessen the immediate impact of their tax liability and provide them with a safe, solid return assuming the LTV is low. And it can potentially provide you with better terms, low or no fees, and easy process.I think the potential trouble could mostly arise with you, as the buyer, not having a large enough down payment or not enough skin in the game.