What is seller financing in real estate?

Learning about seller financing is a major revelation for many investors, perhaps as exciting and addictive as their feelings when they first learned about real estate investing.

“You mean I don’t have to go to the bank, I don’t have to apply for a loan, I have to make an assessment and I have to make a 25% down payment? Instead, can I discuss my own down payments and interest rates and pay the seller over time ?! That’s great! “

This is a revelation for a good reason. Vendor financing, once fully understood and mastered, can actually be a game-changer in building a real estate portfolio.

But when it’s easy to learn about this exciting new concept and then rush in with enthusiasm and start making offers with seller funding, many investors can also quickly find themselves frustrated and discouraged.

“I can’t accept my seller’s financing offer to any seller,” they report back in frustration.

While this may seem frustrating at first, there is good news: with a simple change of outlook and strategy, investors can start to get better feedback from sellers.

More on seller funding from BiggerPockets

What investors misunderstand about financing sellers

First, let’s start by understanding the problem. The main mistake I see many investors make is offering seller financing in situations where it doesn’t really fit the seller’s situation and is very well needed.

They see a property listed on the market, know nothing about that seller or their status, and then offer the seller financing. From the seller’s point of view, this proposal is random, irrelevant and misleading.

So, what exactly?

The best approach is to follow vendors specifically whose needs and circumstances are conducive to vendor financing.

In other words, it’s about shopping for one person – a seller who is a great candidate for seller financing – not any property. Shopping for this person is done better off-market than in MLS, where recognizing your seller is difficult and impossible.

Think of it this way. Seller financing solves a specific problem. If you want to give this solution to anonymous people who do not have a matching problem, it will be irrelevant to them and they will reject it (and turn a blind eye to it). But if you take the time to understand the problem – and identify the type of person who has the problem – it will be easier to find a recipient to solve it.

This includes the important epiphany: seller financing the seller himself. It’s about the people and the problems they face. It’s not about the property, and it’s certainly not about how the buyer wants to finance the purchase.

So, if seller financing is about the seller himself এবং and their specific problems that will be better solved by seller financing এটি it raises the critical question: Does a perfect seller finance candidate have a problem?

Although a seller has many potential problems that can be solved through seller financing, I will share with you the three primary seller problems – and thus, the primary drivers – that have led me to a great seller financing business.

The seller may or may not recognize these as “problems”. But at the very least, they feel like their important consideration is that the seller needs to be adequately addressed in their decision-making process.

Problem 1: They want to defer capital gains tax

One of the main motivations for many sellers who finance sellers is to defer capital gains tax using the “installment sales” structure. This is why non-occupying owners (i.e., landlords) make excellent candidates for seller financing-they are much more likely to have significant capital gains tax obligations than most owners-occupants.

Many sellers get stuck because they don’t want to a) pay taxes and b) exchange 1031 just to do business for other obligations. So when you come forward and offer a way that avoids both their painful instant tax bills and other property purchases, you are offering a valuable and attractive alternative.

Thoughtfully structured seller financing can help reduce the pain of their capital gains without the need to exchange them for another price.

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Problem 2: They don’t want to stop getting monthly income

Many non-occupying property owners have bought their properties as a way to create a safe income stream. So, if they sell the property, how will they continue to earn (especially those who do not want to exchange for replacement property as reflected above)?

Some sellers are financially conservative and not comfortable in the stock market; They just want to keep their money where they think it’s safe – like in a bank. But bank deposits are now paying incredibly low, needing a way to continue earning their income after selling them.

The financing of a well-structured seller can help them earn a monthly income without the obligation to own the property.

Problem 3: They don’t know what to do with the money

While many sellers need and want their equity to increase their income, others do not need money from selling their property. In fact, the possibility of getting a single cash, and feeling the pressure of managing that money seems burdensome to them.

Thoughtfully structured vendor financing can take that burden away from them. They can rest assured that they will receive monthly loan payments and their investment is protected by realistic real estate collateral.

By reviewing these three main issues that lead to optimal seller financing opportunities, notice how much the property was. Almost nothing. It was about the sellers, their situation and their needs.

How to find and negotiate seller financing agreements

Now that we understand the major issues a seller may face that could lead to a seller financing agreement, how do we find and discuss these agreements?

Let’s divide it into two steps: search and discussion.

Finding a deal

Looking for deals to identify people who have these problems. My advice – which I do in my own business – is simple: if you want to buy property with seller financing, focus on finding sellers who will make a significant capital gain if they sell their property.

Who is he? Non-occupying owners who have long owned their property and the value has increased significantly. While you may not know with 100% certainty that these vendors will say yes to a vendor’s financing offer, you do know that you are fishing in stocked ponds with the kind of vendors you want to catch.

Agreement negotiation

The key to negotiating a deal is to do everything about the seller – not you, not the property. Adjust your perspective, from “I’m making a proposal with seller financing because I want to finance this purchase,” to, “I’m offering seller financing because I believe it’s the best solution to the seller’s problem.”

When you present your proposal, frame the conversation around them and what they are trying to achieve, and place your proposal as your professional recommendation to help them get what they want.

In short, if you want to buy more property with seller funding, you need to master the art of finding sellers for whom it will be a relevant and valuable solution.

While most other investors wandering aimlessly around MLS are constantly asking sellers if they will accept seller funding, you will talk to the perfect candidates there and conclude a deal for your portfolio.

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