Once you have located a property, done your due diligence and decided that the numbers work you have found yourself a good deal. If the owner has owned the property for a good amount of time and has equity in the property, you could explore the option of utilizing seller financing for all or part of your deal.
There are some potentially significant benefits to utilizing seller financing to close a deal. For one, both the seller and the buyer can reap substantial savings at closing. The interest rate, payment schedule and other loan conditions can all be negotiated between seller and buyer. And there are more benefits—some for the seller and some for the buyer.
Let’s look at the following scenario…
You received funding from a bank for 75% of the funds for your deal. You have the option to explore seller financing for the remaining funding. In essence, the seller would function like a bank.
For the examples below, we will assume a 5-year exit strategy in our acquisition. You can follow these in order if/when you have a seller who is willing to consider seller financing.
Seller Financing Options
Principal Only. This option protects cash flow and allows seller to receive more for property. Approximately 10-15% of sellers will do this.
Principal & Interest. This allows the seller to collect an interest but protects your monthly cash flow. If the property appreciates well, it is easy giving the interest.
Interest Only, Monthly Principal. Here the monthly interest is a very low payment. Again, this protects your cash flow.
Principal & Interest Monthly. The benefit is when this might be the only way to get the deal done.
Seller Owns Outright
When the owner owns the property free and clear, a different type of seller financing could be possible. In this scenario, you are saving the seller thousands of dollars on taxes, as well as offering them steady income for a period of time.
When this is the case, the seller finances most of the deal. The seller again, functions like the bank, and there are agreed upon terms for principal and interest, following the four options outlined above.
Always remember that you are helping out the seller with their tax responsibility (use this in your negotiation).
There may be some instances with the seller owning free and clear, where the seller wants to get rid of the hassle of dealing with the tenants. The seller could entertain terms with you if you offer to take over and do everything while keeping the seller in a small equity position on the property.
As with any type of transaction, be sure you do your own due diligence and understand everything about seller financing BEFORE you get into such a deal.