On to today's topic … My best source for financing deals. Period.
This one will blow you away. And even if you have a general idea of how this works you've never seen it work quite like this.
It's called seller financing. It's true. One of the best sources of financing you can tap into is with your own sellers, especially in a down economy when housing sales are slow. Sellers are much more receptive to creative financing arrangements.
In fact, we're finding that seller financing is more available now that it was three, four or five years ago because banks aren't leading as much, particularly on income properties and on run down, beat-up properties that we want to target. If sellers want to sell right now, many times they have to hold the financing, which is good news for you.
Put simply, seller financing means you're borrowing money from the seller instead of a bank. It's also referred to as owner financing or purchase-money mortgage.
Here's how it works. Let's say a guy owns a property and it's in beat up shape in a low- and moderate-income neighborhood. The seller is asking $100,000. I run my Cash Flow Analysis and I determine that this would be a good investment opportunity. So I offer him $5,000 down and ask him to act as the bank. In other words, he would hold the mortgage on $95,000 and charge me 5% or 6% interest for 30 years.
Many times, people who own multi-unit income properties attended a real estate seminar or read about this type of financing but didn't get the proper training like you have to manage the property. So they get stuck with a bad investment that they overpaid and tenants who aren't paying the rent.
Rather than looking at the investment property as a business they get distraught and the next thing you know, they're motivated to sell.
This has happened quite a few times in my career and usually results in a terrific opportunity. And quite often in these situations, the owner is already familiar with the concept of seller financing which makes it much easier to get the deal done.
Others may not be familiar with the concept of seller financing so you may have to educate the seller. Some of the best prospects for seller financing are older property owners who may not need the cash immediately and may not want to incur a large tax consequence all at once.
“Show me the money!” Here's how to pencil out a deal…
In situations like that, I pencil out the deal. Let's say the property owner wants $100,000 for property. I offer $5,000 just like the previous example and the seller would hold the mortgage on a $95,000 loan for 30 years at 6.0% interest. The monthly payment would be $570.
I'd then show the seller that in one year, he or she would get $6,840 back. And over 30 years, the seller would get $205,000 back with interest by acting as the bank! Plus, the seller only pays taxes on the money earned each year instead of on the entire sale at once.
For example, if the seller bought the property at $50,000 and sold it for $100,000 the seller would be taxed on the $50,000 difference according to the capital gains tax. But under the seller financing deal, the seller would only be taxed on the $5,000 down payment and the $6,840 earned in the first year.
Be patient because you'll most likely have to educate sellers about this type of financing arrangement. This may not be the best solution for all sellers.
Listen to their long-term plans. Be empathetic. And offer it as a possible solution.
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