Seller carryback financing is often confusing to new investors – sometimes it even baffles folks with a bit of experience who simply haven’t had occasion to use it. First you need to understand that seller financing is not really like bank financing or a regular mortgage, even though it’s often referred to as a private mortgage.
Seller financing is really an extension of credit given as one of the terms of the purchase agreement. For example: If I offer to purchase your property for $100,000 – and I agree to pay you a $10,000 down payment – and ask you to finance the balance ($90,000) of the sale taking monthly payments of $750 per month, including 07% interest for a period of 20 years — I’m asking for TERMS, not money! I’m simply asking you to extend me credit so I can purchase your property over a 20 year period of time.
Quite often real estate agents will tell their listing clients, like in the example above – it’s not good for you to become a lender when you sell! Why should you loan Jay $90,000 so he can purchase your property? That doesn’t make sense, they advise! What doesn’t make sense, of course, is their incorrect analogy of what’s going on! I’m not asking for a loan, I’m asking for credit terms. That’s it!
Since many properties are in the hands of real estate agents and because so many agents call seller financing a loan when dealing with their clients – it’s no wonder a novice seller might be confused.
When a traditional mortgage or loan is part of the real estate sale – real dollars are disbursed by somebody, usually the bank! Using my example – the traditional method – I put up $10,000 for the down payment, then I qualify for a bank loan of $90,000 so I can give it to the seller. This is a true loan! I borrowed hard dollars from the bank, then I handed those dollars, along with my $10,000 down payment, to the seller in exchange for his property. The bank placed a lien (1st mortgage) on the property to secure the $90,000 they handed me! Now that’s a real loan!
TRADITIONAL REAL ESTATE – TRADITIONAL LOANS
Most real estate is sold with traditional financing – meaning banks will provide the money. That’s most likely the way it’ll always be. But because terms are far superior to loans in the investment world – terms are what I’m always looking for! To get terms, you must deal with people. Dealing with people is how you create cash flow deals and end up with the benefits you need to build personal wealth. Bank loans are a necessary ingredient for some situations, but you need to try for financing terms first. In my opinion – you give up far too much control with bank loans (mortgages). Remember, I’m talkin’ investment properties, not your personal residence (that’s different).
To start with, most bank loans require personal liability, as well as the property for security! That means with bank loans, all your assets are at risk. Obviously, when I started out that was no big deal ’cause I had nothing that wasn’t heavily mortgaged! I wasn’t nearly afraid of someone suing me to take my stuff. I was more afraid I might have to keep it! Things change when you make a few bucks! Now I don’t want my assets lined up like dominos where tipping one over makes them all go down. To me, bank loans are like dancing with gorillas — The dance ain’t never over til the gorilla says so.
COST OF BUINESS CHEAPER
There’s an old saying that goes — You have to spend money to make money! Many investors go broke trying to accomplish this! A much better strategy might be — Spend the least amount possible! Convincing sellers to finance their investment properties is an excellent place to start saving money!
To begin with, traditional bank financing always starts with an appraisal and obviously they cost money usually your money! Who needs one anyway? I certainly don’t! I already know what my property value is! I don’t need any help from an appraiser. In fact, his appraisal might be detrimental to my future selling. What if there happens to be an appraisal on file showing far less value than what I’m asking? Can you see where that estimate might not be very helpful to me? I don’t need documents with someone’s estimate of value laying around. I’ll do all the estimating myself. I certainly don’t want to disclose a “low ball” appraisal!
Costs and expenses don’t stop with appraisals. There are more fees and escrow charges than you can shake a stick at! Where’s the benefit for me? There ain’t none, that’s where.! Also, have you ever noticed that banks will often ask for termite reports – they also insist that any repairs be done before they loan one stinkin’ nickel. Who pays for that? You guessed it – it comes right outta my new bank loan!
FAIR WEATHER LENDERS
There are times when banks will practically beg you to take out loans – but also times when they all but shut down completely. During the time Jimmy Carter was president, you couldn’t find a single banker who would even talk about real estate lending. They were shut down completely! If you’re investment program was dependent upon bank loans and there were none — Can you guess what would happen? I think you’ll admit, there’s probably not enough bridges for investors to leap from!
I buy “beat up” and badly bruised real estate! Years ago, I learned that bank loan officers don’t like my properties. They like new houses and tidiness. New and tidiness are words hardly ever used to describe my properties. That means that most loan officers will most likely run for the toilet if they see me approaching their loan desk! I learned a long time ago that my business must be conducted for the most part without bank participation! As it turned out, that would be a very valuable lesson for me because it forced me to seek alternative financing in order to stay in business!
One of the main reasons I buy the kind of real estate (beat-up & bruised) I do is because it comes with many profit-making benefits not common with most properties. Seller financing ranks near the top as one of the major benefits I’m seeking. Another is the opportunity to immediately change the property from a “pigsty” to charming income units. Obviously this important benefit allows me to increase the income much fast than would be possible if the property were already up to snuff when I bought it. You must understand that quick cash flow and bigger profits are the reasons I’m investing to begin with. My houses are not keepsakes, they are money generators! If your investments are not producing profits and cash flow, it might be well for you to re-think why you invested in the first place.
I want you to be crystal-clear about why I’m able to get seller financing for a large percentage of my purchases – while most investors do not! The reason is because I look for sellers who own properties that most banks will not finance. They simply turn their nose up because the property looks ugly – or it’s not up to current building codes. Houses without a concrete perimeter foundations automatically get rejected for loans where I live. These houses have already been in service 60 years or so. Buying for a discounted price and good seller terms should give you the extra money to fix them if the need arises.
SELLER FINANCING MUST BE CREATED
Sellers will not generally offer financing terms unless there’s some compelling reason – or unless you can negotiate one-on-one and present a convincing argument in favor of non-bank financing. With real estate agents involved, it’s almost impossible because they will normally recommend new bank financing for most deals. The way they see it, with bank funds coming into escrow, their commissions are all but guaranteed!
Under normal circumstances, real estate agents will do everything possible to keep a buyer away from the seller. It’s like they say about attorneys in the mix -loose tongue buyers can also kill a deal. Often they are right! I’ve found you can truly benefit yourself, one-on-one with sellers, if you know what you’re doing however; you must be very sensitive to your agent’s feelings at the same time.
Like with my agent Fred – I will always ask his permission to visit the seller with him. I explain to Fred that when it’s time to talk about seller financing, I feel I can be very helpful. That’s all I intend to talk about you have my solemn oath. I further explain to Fred that when the seller financing discussion is over, I’ll butt out! I’ll go outside or whatever, giving Fred the privacy he needs to talk directly with the seller – without me in the room.
If you intend to make this personal visit work for you – and still keep your agent objective about it – you must show courtesy as I’ve described above. You must also keep your promise and not say anything other than what you’ve agreed to. In my situation with Fred – he now trusts me in the same room with the seller because he knows I will not say anything to blow the deal! Obviously that’s very important to him because his commission is at stake.
MAKING THE CASE FOR THE SELLER FINANCING
The number one reason that sellers object to carryback financing is safety – THEIR SAFETY. When banks finance their deals, they get the money soon as escrow closes – it’s done. When they carry back financing for the buyer – it’s not done! They may have to wait 15 or 20 years before it’s done! This is where the seller’s safety comes in. Their big concern — Will they get their money as promised? That’s the big question you’ll need to answer to their satisfaction if you intend to do much seller financing business. Simply telling the seller that you’re an honest, upstanding person won’t likely cut the mustard!
I’m always willing to provide potential carryback sellers my financial information – PROFIT & LOSS STATEMENT and my current FINANCIAL STATEMENT, as well as my property addresses (locations) and a list of mortgage holders. This information gives sellers an excellent picture of my current financial status – plus the opportunity for them to check me out with other folks I send monthly payments to! I don’t hand this information out until we have a signed deal in escrow. It’s one of the provisions in my offer to purchase — BUYER WILL PROVIDE FINANCIAL RECORDS FOR SELLER’S REVIEW AND APPROVAL WITHIN 5 DAYS AFTER ESCROW IS OPENED AT ABC TITLE CO. SELLER WILL APPROVE BUYER’S CREDIT WITHIN 10 DAYS AFTER RECEIPT.
Some sellers will want a bit more assurance that they’ll get their money as promised. One of my favorite techniques is to offer what I call double protection in the form of additional collateral. I’ll pledge equity in another property that I already own, in addition to the security of the property I’m buying. In other words, I explain to the seller — If I should default on the carryback financing with you, you will be in position to not only take back the property you’re selling me – but also, you can take the additional property I’m pledging as well! That gives you the extra protection that I’ll keep my promise to pay you! This additional collateral method works well with many sellers and it saves me down payment money without costing me a dime.
TALKIN’ MONEY WITH THE SELLER
Quite often sellers will “open up” a bit if they like you! Naturally, that’s the reason I like to meet the seller in the first place – to present myself! I’ve found that if the seller likes me – and judges me to be an honest person, he’ll also confide in me. He or she will most likely tell me their future plans and what they intend to do with the money from the sale. When I purchase properties from older sellers who are retiring – I can just about guess the answer every time! They want the money to be part of their retirement income. They plan to deposit it in the bank and supplement their monthly retirement income. That’s pretty much what we all do when we sell out, I think!
Many of these retirement-minded folks are simply not educated when it comes to money matters. They need coaching! This takes patience and understanding because it’s difficult to change how people view money and its use. For example~ my Mother and Dad both thought saving money was how you end up wealthy. They shared the opinion that investing was too much risk! I doubt seriously if they ever changed their views even when they saw my success. Mom just said I was lucky — I think Dad agreed!
One nice couple I acquired property from wanted $100,000 cash upfront to supplement their retirement when they moved to the coast a couple of hundred miles away. By drawing $700 each month from the account, they could live very comfortably, they said!
How I converted them to carryback financing was quite simple. I showed them that their $100,000 bank account would only last for 12 years by drawing $700 each month. Using my proposal ($100,000 carryback note) – at 07% interest, they would be able to draw $700 per month for more than 25 years before the well went dry! Which one would you take? Always make ’em secure first – then explain how the money works, and presto, you’ll be doin’ seller carrybacks with the best of ’em!