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Have you ever considered how seller financing could be your secret weapon when buying real estate?
When traditional banks give you the side-eye or the sellers ask too much for their properties, seller financing (or owner financing) can be the missing link that enables you to keep moving when everything else grinds to a halt.
Seller financing can enable you to buy all kinds of properties that would otherwise be out of reach if you were stuck using your limited cash or traditional banks.
It can cut through the red tape, helping you seal the deal faster with terms that could be even better than what a bank will offer (depending on the seller and the deal, of course).
Seller financing can be a BIG win-win for both parties, and many sellers are open to at least hearing about it as an option (especially if it means they can get the price they want), so you'll want to know how to have these conversations when the right situations arise.
Explaining this concept to sellers clearly—without confusing or overwhelming them, while still providing all the important details—can make the difference between closing million-dollar deals and missing out entirely.
Getting the Seller to “Yes!”
The challenge with seller financing is that most property owners have never done it before, which often leads to confusion about why and how they should sell a property this way.
Even if a property owner is familiar with seller financing, they may still be hesitant because they want 100% of their money now rather than waiting to make even more over the long term.
While you can't force a seller to work with you, you can master the art of:
- Understanding their needs.
- Presenting your terms in a way that adequately addresses their needs.
Even if you can't turn a lousy deal into a great one, you can still polish it up and make it appealing, especially when you know what the seller truly wants. 🙂
Let's explore the best practices for explaining seller financing in a way that gets sellers willing to listen—and maybe even excited to close the deal with you!
The Negotiation Script
Matt Theriault is a real estate investor with many years of experience.
He has bought many properties with owner financing and has mastered the art of having these conversations.
In this clip from episode 178 of the REtipster Podcast, he explains how he approaches these conversations.
Matt explains that when negotiating with a seller,
“It's either our price and the seller's terms or the seller's price and our terms; you only need to get control over one of them.”
For most sellers, the price is the only thing they understand because they have little education on seller financing.
If you start trying to pitch them on a seller financing offer as your first order of business, their guard will probably go up because you'll be speaking a language they don't understand (i.e., you'll sound like a scammer).
This is why Matt starts by negotiating the price first.
He only discusses seller financing if he and the seller reach an impasse on the price. Even then, he is very careful with how he chooses his words.
Here's how Matt starts the seller financing conversation:
“I might be able to give you a little more if I can give you some money now and the rest later. How much do you need right now?”
Another way I've heard this phrased is,
“Would you be open to receiving that full amount in monthly payments?”
Remember, in a perfect world, the down payment would be $0 (which would give you an infinite cash-on-cash return).
In some cases, you might be lucky enough to get this, so it's always worth asking. However, realize that it's not common for a seller to agree to nothing down (not impossible, but not common).
Once the seller tells you how much money they need to have now, this establishes your down payment.
Your next step is to determine how you'll pay off the balance.
Matt starts this part of the conversation by saying,
“Most people I work with allow me to pay off the balance in 300 equal monthly payments. Are you okay with that?”
Matt starts with 300 monthly payments because this is a long term (25 years), and a longer term is highly favorable for the buyer.
However, most sellers will say “No” because they want their money back faster.
In that case, Matt follows up with,
“How many payments would be acceptable?”
Whatever the seller responds with, it's up to the buyer to determine what will work for them.
The benefit of starting with “300 equal monthly payments” is that you can anchor this number in the seller's mind.
Also, another BIG, important, underlying assumption in this conversation is that unless the seller says otherwise, you'll be paying a 0% interest rate.
Ultimately, your goal as the buyer is to get the longest term possible, with the lowest interest rate and the least amount down as possible.
You probably won't get everything stacked in your favor, but if the seller insists on one or the other, you can give it to them if they let you stack the other terms in your favor.
RELATED: The Last Loan Calculator You'll Ever Need
The “Tax Strategy” Offer
Aside from the money itself, another potential benefit worth mentioning to the seller is a “tax strategy offer” that may allow them to stretch out their capital gains over a longer period, potentially lowering their annual tax liability.
Here's how it works:
- Capital Gains Tax: When a property is sold for more than the owner's original purchase price, the seller incurs capital gains, which are taxable. The rate at which these gains are taxed depends on the seller's overall annual income and the duration they've held the property.
- Installment Sale: In an owner financing arrangement, the seller effectively agrees to receive the purchase price over a period of years, rather than all at once. This can be structured as an installment sale, which allows the seller to report part of the gain each year as they receive the payments, rather than all at once in the year of sale.
- Tax Bracket Management: By spreading the gains (and hence the income from the sale) across several years, the seller might avoid being pushed into a higher tax bracket in any single year. This could potentially lower the overall tax rate applied to their gains compared to if they were to receive all the funds in one year, assuming that additional income would catapult them into a higher tax bracket.
- Annual Tax Liability: With the income from the sale received and reported over several years, the seller's annual tax liability could be lower than if the gain were taxed in a single lump sum, especially if the installment payments keep their total annual income within a lower tax bracket.
It's important to note, though, that the specific impact depends on various factors, including the seller's overall income, the property's appreciation, and the terms of the owner financing. It also depends on the property type and whether the seller is considered an investor or dealer.
When mentioning this kind of tax strategy offer, the seller will ultimately need to consult with their tax professional to understand the specific implications for their situation. It's not something you'll want to take on yourself and try to figure out for them.
That said, if the seller's tax professional can help them determine the appropriate terms, this approach not only positions the offer in a financially strategic light but also demonstrates your consideration for the seller's financial well-being, making your offer more appealing.
If you need a refresher on the fundamentals of writing sound, reasonable offers, consult our guide on How To Write Offers That Get Accepted (With 3 Simple Pages).
Selling the Benefits of Seller Financing
If a seller needs some more convincing or compelling reasons to consider a seller-financed transaction, you could underscore even more benefits by mentioning the following:
“Instead of this property costing you something each year, we turn it into a source of passive retirement income for you? This will give you a steady stream of income for years instead of taxes, insurance and other hidden costs each year.”
“We can set this up so the income is truly passive for you by using a loan servicing company to collect, track, and automate each payment and automatically funnel the money into your account each month.”
“If you work with me, you'll sell your property much faster without paying any broker fees.”
“You'll also have the property as collateral. If you're worried that I'll stop paying, you'll get the property back; you can keep all the money I've paid you to date and then sell it all over again.”
“This is one way to invest your money long-term with a higher return than traditional stocks.”
Depending on the terms of the deal, these are all legitimate points worth mentioning to the seller if they need more compelling reasons to do this kind of deal.
When you start talking with sellers about buying their property with owner financing, even when using all the right language (like in Matt's example above), it's helpful to go into these conversations with realistic expectations.
In all the conversations I've had with sellers about this, only 20%–25% of them were open to selling their property this way.
Even if you're doing everything right and explaining the process perfectly, don't expect everyone to say “Yes!” because, for understandable reasons, it may not make sense to them.
This is okay.
The point is for you to understand how to negotiate and explain the deal so that sellers can easily understand how it works and decide for themselves if they want to play ball. To learn more about the different types of motivated sellers and what to expect when dealing with them, check out our post Understanding the Motivated Seller.
