How can I convince sellers to owner finance my real estate investment?
As a general rule of thumb, sellers hate owner financing. They want their money now. So, the question is, how do you go about convincing them to owner finance your real estate investment? It’s not easy. I know dozens of successful investors around the country, and only the best of them can convince sellers to owner finance on a regular basis. When it works out, however, owner financing can add significant value to your real estate investment. Here are three tips for figuring out how to make it happen:
Use Owner Financing to Solve the Seller’s Problems
Going into any negotiation, you should always start by putting yourself in the seller’s shoes. How can you solve their problem? Every situation is different, but assuming the seller is motivated, you’ll see these three scenarios the most:
- The seller is financially distressed and they have little or no equity
- The seller is financially distressed and they have some equity
- The seller is financially sound and has equity, but is tired of dealing with the property
In the first situation, owner financing is usually impossible. One of the basic requirements is that the seller has some equity after paying off their mortgages and other liens. If all of the money is used up from paying off debts, there’s nothing left to finance.
Sellers in scenarios 2 and 3 are more likely to agree to owner financing. If they’re financially distressed but have some equity, you can give them enough money to pay off their debts and then owner finance the rest. Or, if the seller has no immediate need for their profits, you can show them how they will make more money by financing the purchase for you than putting the money in the bank. The key is looking at their situation and figuring out a way to solve their problem, plus give you favorable terms.
Use Owner Financing to Beat the Competition
Owner financing is also a great tool when you’re competing against other investors. Use it to give them a higher price than your competition is able to stomach. For example, let’s say you find a single man that’s been transferred to another city by his job. He owns a $100,000 house without any mortgages or other debt. Because he’s moving in only two weeks, he’s willing to sell the house for a discount.
An experienced investor might offer $70,000 cash with a closing in only one week. It’s attractive to the seller because he’ll be able to close before leaving town. You might not have that much cash, so instead, you offer $80,000, if he’ll give you 100% financing with 0% interest for the first six months. If the seller is in no hurry to see his money, he can accept your offer and still close before leaving town, losing $10,000 less.
It’s a rare scenario, but when you run across it or variations of it, you can effectively use owner financing to outbid other investors. I’ve seen all-cash investors blindsided by an owner financing offer several times. Just be careful that you leave yourself enough room for profit. You never want to overpay for a property, regardless of the financing.
I really enjoyed your article on owner financing as you tell it like it is. Owner financing in the form of a real estate note is an excellent way to move a for sale by owner property, especially in a slow real estate market. Slow real estate markets usually mean that most conventional buyer pools have been maxed out mainly due to increasing interest rates. So while the conventional real estate market is adversely affected by rising interests rates, owner financing becomes the home selling technique of choice. What a lot of people don’t realize is that they don’t have to wait for their money just because they are offering owner financing. As a matter of fact, a newly created real estate note can be sold at closing. So you will receive all cash in one lump sum right at the closing table.