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.
When meeting directly with a motivated seller, make four offers to buy their house.
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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jim,
Thanks for the suggestions.
When you make the range of offers, how do you set the ‘all cash’ price?
Here is one suggestion. Curious if this would work based on how you like to set up your deals.
In some way, the cash price should be based on the difference between the seller financed price minus the cost of the money (interest, fees, JV costs, etc). The seller ends up paying for the cost of external financing.
Your views?
No payments for six months is a sweet deal. Bought an estate house last November with nothing down, no payments and NO interest for six months. Spruced it up first month, then rented it. We cleared $862/mo. for five months before the loan payments kicked in.
Motivated sellers are a wonderful thing.
Cheers
John – Your right, but I make these offers while sitting in the house of the seller so I don’t over analyze either.
I make the cash offer the lowest and hope that they take an offer with zero interest. I present the four offers and say “surely one of these four offers should work.” My hope is they can’t say no to four offers.
Jack – That is an awesome deal, congrats! I love estates. Way 2 go get your cash flow. You carefully crafted your cash flow
Jim
These ideas are so timely. I am in the process of looking for a rental home in Martha’s Vineyard and these ideas are excellent for the couple of seller motivated deals i have found.
thanks
Shirley – That is awesome. I imagine it is a great time to buy in Martha’s Vineyard! Way to use creative real estate to get the best deal possible.
Jim
Great Information , there are a few homes in my neighborhood that owner will carry, I will try this technique this week.
Vegas Is Flooded with homes that can easily use this concept to see a return on investment.
Thanks
Poor Lil Rich Investor.
Nadia
Thanks for your comment. You are right about Vegas. Best of luck applying these and I hope you get some zero interest financing soon.
Jim
nice information keep up the good work. well at lease i know theirs one person out that is trying to help some try to get ahead in life. god bless
It’s funny you mention the JV agreement. Due to statutes and real estate regulations here in alaska, it’s illegal to handle property without having an equitable interest in it. So I had an attorney draft JV documents specifically for foreclosure properties with equity in them. I am targeting those with 30% equity or more. Not hard to do here in alaska as we didn’t get hit by the recession as hard however single family homes have had almost no appreciation for the past 3-4 years. I bring the money to stall, or cure, their preforeclosure while the homeowner brings the equity of his home and we agree to split any profit after all costs, typically 50/50. My contracts stated that any expenses incurred to facilitate the sale of the property are considered “costs” and are paid back to the company before the profit split takes place, thereby at least getting back what was put into the deal. It also goes a long way to fending off possible lawsuits and objections from members of the real estate community because we have some “skin” in the game and most realtors won’t do a deal like that.
I’m a newbie… But how would you know if the project has the potential of seller financing?
I’m losing my mind cuz I can’t seem to complete this scenario. I’m making three offers on a small apartment building. The one offer that is making my head swim is this: I want to structure a no interest, no payment for six months, at the beginning the contract. Could I use the NOI from the gross income for that six month period, to give the seller a delayed down payment? Example: 115 units leased at $525/mth times six mths=$362,250. Taking out the current expenses of 60% leaves $144,900. He needs $135,000 for his down payment. Now, is this a doable project according to what I just presented you with? And can I structure the deal this way if a bank is involved? Ok, please help, fire away!!
i.m new @ this looking to purchase something in florida with owner financing and no down payment.my question would be would your plan work with this in mind when looking for sellers.that are ready to sell asp..
I want to make an offer on a home with no existing mortgage. The home is owner occupied with the owners being required to move to Florida for employment. The house is single ranch violation free and the asking price is 109,900. Other houses with comps have the price in the $70 -80k. The house is updated has one floor with finished basement and fireplace in the basement. Three bedrooms with lots of storage and all appliances go with the sale.
I have been FHA approved for $70K but I have retirement funds that would require at lease 3-4 months to access for the difference. The problem is that the owners are renting in Florida and their lease expires in 2months. They need their money to buy in Florida so they are looking for an all-cash offer of their asking price and a closing in 60days
The owners are extremely motivated to sell. I am extremely motivated to buy.
Any ideas?
We are renting a home in California and we don’t want to have to move again. The house is worth about 590,000. How can I come up with a win win offer?