When a seller has little or no equity and good terms on their loan I ask them “Would you CONSIDER selling the house for what you owe?” By showing them what they would net after selling through an agent, paying closing costs, negotiating price, doing minor repairs, paying a commission and perhaps making continuous loan payments until it's sold, many times they see that they will net less than they think.
Then I add the facts that we can close whenever THEY want, they can sell “as is”, they won't have to place the home on the market AND they won't have to worry or wonder when or if it will sell. All combined, it makes for a very logical decision on their part.
You can usually make a nice 5-figure profit buying the house for the existing loan balance and then reselling for 5-10% above market value because your can offer your buyer flexible owner financing (or Rent-To-Own) terms. No bank qualifying terms make the property more valuable and desirable for those who need time before getting a regular bank loan.
You need at LEAST a $19,000 spread between your purchase price and your worst case selling price. I usually offer to sell the house a bit higher than I expect to get so I can drop down to my worst case price if the home is not under contract to resell quickly. I assume that I may wind up losing $4,000 of my spread in holding costs, resell costs, rent credit and unexpected repairs. On almost every deal I'm assured a minimum $15,000 profit.
EXAMPLE of a house in good shape:
Average comparable sales: $150,000
Planned selling price with terms: $164,900 (high end of comparable range)
Worst case price: $159,500 (bringing it down to the $150's)
Maximum allowable offer: $140,900 ($159,500 less $19,000 spread)
Loan balance: $132,000 (as an example)
If they won't sell for the loan balance, then ask “How close to what you owe do you need?”
Max allowable cash out of my pocket (2% of $159,500) = $3,200
Minimum cash recaptured from buyer quickly (3% on Rent-To-Own) = $4,800
Would you pay $132,000 plus $3,200 cash (total $135,200) for a house you can resell for at least $159,500, if the existing $132,000 loan had a good payment and terms?
I sure would and do all the time. On this deal I'd seek to buy by taking over the debt (you have no personal liability) and then giving the seller $0 to $3200 down. I know I will get at least $4800 quickly, probably more, from my buyer because no one gets in without at least 3% down.
If they owe too much on the house to make the $19,000 spread work, then you may ask them to PAY YOU to buy the house. Always determine something that would work for YOU and make them an offer accordingly (even if you do know if they will take it).
Let's say the only owe $100,000, therefore they are expecting more cash. Anything you offer them over the $3,200 may have to be offered in the form of an owner carryback note, with or without monthly payments, and with or without interest. Tell them they will get paid off in full after you refinance the house (when your buyer gets a new loan) down the road. Or offer to attach the note to one of your other “keeper” properties to stretch it out longer. In fact, the note does not have to be secured by real estate at all.
Here are some more ideas on setting up and persuading a seller to deed you their house without paying off their existing loan. These are praises I use, on the phone or in person, followed by Common Response (CR) and my Follow up Response (FUR):
1. “I can pay more for your property if I take over the existing loan.”
CR: My loan is not assumable.
FUR: That's OK. I know several ways to do it. When we get to that point I will explain how that works. Where are you moving to? When will you be buying another house?
2. “I am going to take over your loan and be responsible for all payments until it's paid off. You'll be relieved of the debt.”
CR: Why don't you pay it off now?
FUR: “I can pay you more if I don't have to pull my cash out of other investments that get me a very high return. The only way I can get close to your price is if I take over your loan. Let me ask you again, what is the least you could take all cash?
3. “Would you consider selling for what you owe?”
CR: No, I was expecting to get more than that.
FUR: “How close to what you owe can you get?”
4. “I can take care of your loan, pay all cash for your equity, and close whenever you like. Those would be the best terms for you, right? If I do that, what would be the least you could accept, your bottom line?”
CR: I need at least $10,000 alter paying off my loan.
FUR: Is that the best you can do?
5. “I can take that loan off your back and close quickly. If I took the houses as is, what is the least you could take?”
CR: I don't know, I have not thought about that. I need to speak to my spouse.
FUR: That's fine. I won't hold you to a number, but I do need an idea of your bottom line before moving forward with my research. What the least you could take?
6. “You have some equity in the house. If I give you part of your cash now, and most of it later, I can pay you more money for the house. Can you wait for your equity, and still get into your new home?”
CR: How much do I get now?
FUR: That depends all the whole deal. I have to see the house first. Can you wait for all of it if I made it worth your while?
CR: How long to I have to wait? What do you mean by later?
FUR: We can look at that. The longer you wait the more I can pay you. Would you like to meet and show me the property?
7. “Sure, I can give you interest. If you were paid off and you put the cash in a savings account, what will the bank pay? 3 or 4%? I might be able to do that. What's more important, getting the house sold quickly at a fair price, or interest?”
CR: Mortgage rates are at ___%. I would want al least __%.
FUR: We can't know all details until after I see the house. What I can do depends on all the elements of my purchase. I'm sure we can come to some agreement. Let's look at the other details. If you insist on __% then I'll see if I can work up an offer which gets you that.
Let sellers close whenever they want, sell “as is” and avoid having to place their home on the market. They don't have to worry or wonder when or if it will sell. because you, as a professional house buyer, can help.