Today’s real estate market has created excellent opportunities for real estate investors to work directly with motivated sellers. These are distressed sellers with a variety of life challenges such as job loss, divorce, or medical challenges. They might be out-of-town sellers with equity, burned-out landlords, or dealing with probate.
As long as the seller is motivated, the opportunities for making deals structured with seller financing are alive and well.
Always Make Four Offers
When I am meeting directly with a motivated seller, I always make four offers to buy their house. The first offer is a low cash price, and I hope they do not take that offer.
My other three offers all include seller financing at prices higher than my cash offer. I hope they will accept terms with a higher price rather than cash with a lower price.
When you negotiate seller financing, your goal is to have a very minimal down payment and very little or zero interest. Here are five ways to structure seller financing offers when working directly with motivated sellers.
1. Half Now and Half in 5 Years
For this example, let’s assume you are buying a house for $60,000 and that you would love to hold it as a rental property. This offer gives the seller $30,000 at closing and then the final payment of $30,000 in five years.
As the buyer, what did you accomplish with this structure? I hope you see that it is equivalent to a zero interest loan for five years. This offer can appeal to sellers who need some money now, but do not really need all of the money right now.
2. Down Payment Exchange
If a seller is insistent on not providing you with seller financing without a down payment, you may be able to exchange the down payment for work needed on the house.
Many houses purchased from motivated sellers will require something to be fixed or replaced. It could be the air conditioning, the roof, or new carpeting and paint.
Instead of paying a cash down payment and then paying cash for the needed repairs, structure your seller financing with a down payment exchange. Agree to a non-cash down payment where you agree to repair the roof or fix the air conditioning in exchange for his down payment requirements.
3. No Payments for 6 Months
Wouldn’t it be nice to have no mortgage payments for the first six months that you own a house? Why not negotiate that right into the purchase of the home with seller financing?
If the seller insists on a large down payment, maybe you can just pre-pay the first six mortgage payments to get him some cash at closing and then enjoy having no payments for the next six months.
4. Zero Interest Loans
Banks and hard money lenders make a ton of money on interest, so when negotiating direct with sellers–make them an offer at zero interest.
Can you how picture how nice a 100% amortizing loan can feel when every penny of every payment drops your balance? When presenting the offer, don’t ask specifically for zero interest. Instead, structure the offer as a number of payments at a monthly price.
For example, if the house is $60,000 make an offer to pay $600 per month for the next 100 months. In 100 months, you own that house free and clear and life is good!
5. Joint Venture with the Seller
What if you could offer the seller a piece of the future upside equity in the house he is selling you? Not many “regular” buyers could ever offer future upside equity. This strategy can be combined with the others and used when sellers resist you other offers.
Make it as a final offer before walking away without the house. It works just like a joint venture with a private lender, but in this case your private lender is also your seller.
This is not an exhaustive list of ways to structure seller financing, but I do hope it helps you think creatively and allows you to make offers that others in your market may not be able to structure.
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