I always say, “I will pay you anything you want, as long as I get the right terms!” It is a proven fact that terms are often much more important than price. Using your “insider” advantages in your counseling with sellers and also being on the inside of the negotiations with your buyers, you can often find terms that fit your investment portfolio so well that you become the person most willing to pay for the property.
Sometimes, you will need alternatives to institutional lending. It might be because of a poor FICO score or simply because you have exceeded Fannie Mae and Freddie Mac guidelines on how many non-owner occupied investor loans that are fixed. Currently, that rule is maxxed out at ten properties or loans. After you have received ten non-owner occupied investor loans, whether houses or apartment buildings, the secondary market will not allow institutional lenders to give you any more fixed money, which places you into the variable/adjustable rates mortgages…violating one of our mandatory rules! Whether the market turns and money dries up or you will soon exceed your ten loan maximum – someday you will be looking for alternatives to institutional financing.
One of the greatest alternatives is seller financing. There are many reasons why a seller might actually enjoy financing their own property. Here are a few of the reasons that I have seen over the years.
- The seller has a large amount of cash and is looking for an investment vehicle. When they are offered a 5, 6, 7 or 8% return on the current market, they are motivated to receive that return from you, especially when the loan is secured by an asset that they know and trust, i.e. their building.
- Often, a seller does not qualify for any tax advantages on sale and will owe capital gains on the full amount of profit, unless the property is sold on an installment sale. An installment sale is where the seller carries back a large portion of the proceeds as the mortgage. They actually loan you the money to buy their property. This loan is represented by a first mortgage or trust deed on the property. The payments are outlined by an attached promissory or mortgage note. The IRS says that these seller carry-back or seller financed loans are installment sales. This means that the seller only needs to pay capital gains taxes on the profit as it is received. The seller’s taxes are spread over the time period for the mortgage note. Because of this benefit, the seller is actually earning interest on money that is otherwise owed to the IRS. This substantially increases the return on the seller’s carry-back and motivates them to provide this opportunity to you.
- The seller has relatives who might be inheriting the proceeds of the sale. These relatives might not be in a position to accept large sums of cash because of their immaturity or lack of ability to manage money. When a promissory note is offered, the sellers/owners find that this may be the perfect solution to provide a long-term annuity to the relatives who will be inheriting the proceeds.
- Real estate sales can often happen during a very unsympathetic market. Anything and everything has to be done to improve the value of the property. One of the ways that you can improve the property is to offer preferential terms.
- Another reason that I have seen sellers carry back financing is from a speculator’s standpoint; if there is a default on the note, they would not mind having the opportunity to keep the down payment then foreclosing on the mortgage or trust deed. This would give them back ownership of the property. This would only come into play if the down payment was sufficient enough to pay the owner back for the time and costs of foreclosure plus any damage done to the property while under the new buyer’s ownership.
We’ll pick up with the “rest of the story” on insider terms tomorrow. Be sure to come back for part two!
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