How to Talk to Sellers About Seller Financing Real Estate Investments
Posted On July 10, 2023
First of all, there are some subliminal things that you have to learn to do. When I say subliminal, there are some basic sales tactics that work in any type of sales environment, especially real estate.
One of them is the association. You have to let your sellers know that people do this. This is normal. It’s not that unusual for someone to sell with seller financing. If he has done this in the past, talk about it. Mention about doing this in the past. People also want to do what others do. If they know other people are doing it, they’ll feel good about it. Let the salesperson know that people do this all the time, a lot of people do it, so he’ll be more likely to do it. Unfortunately, we have a herd mentality. Many times we have to see that someone else did something first, then we have permission to do it.
Also, you want to have some fear of loss, indirectly, in the tone of your voice. You want it to look like this is the only way you can make this deal. In many cases, this is the truth, so you’re not lying to anyone. Let them know that. Be indifferent about it. You have to have the attitude that there are other houses you can buy, especially in this market. Make them feel like they are going to lose something if they don’t go through with the sale with you.
Now, let’s get into the topic itself. There are a few things you can do to convince the seller to go your way. One of them is to offer them a good interest rate. In most of these cases, we are buying these houses, not for a long-term deal, perhaps to have them for a couple of years with a tenant with a lease option to pay for them, or just looking to buy them for a short period of time to fix it up and maybe sell it. Or maybe we’re just looking to get it under contract to sell to someone else. Therefore, offer a good interest rate. Offer an interest rate that makes it attractive for the seller to give you seller financing, so they trust you. You won’t have it that long. That extra 2, 3, or 4 percent is nothing. I’ll pay 15 or 20 percent interest if necessary if the deal is right, just to get the deal under my belt and make some money on it. If you’re only going to make 3 or 4 payments, what’s the difference if you pay 20 or 25 percent? It’s only going to be a couple hundred dollars extra. If the deal is good enough to take, it’s good enough to take at a higher interest rate. Do not make the mistake of financing at the same rates that banks give.
Another tip for you if someone is uncomfortable is to offer them a balloon. A balloon on a mortgage means that the mortgage will be paid off in full within a certain period of time. So a 3-year balloon mortgage guarantees the seller that in 3 years or sooner, we’re going to pay off that mortgage and they’ll have all their money. It also allows them to defer their taxes. If you sell your house today for cash and get your HUD, go to closing and get the full amount, you are required to pay taxes on the full amount of your gain. (Make sure your accountant checks this for you on an individual basis.) When they sell the house to you with owner financing, they don’t have to pay taxes on the full amount, because they don’t get the full amount. It allows them to defer their taxes for one or two years, or until the loan is paid off in full.
Also, they are acting like a bank. I have told sellers that the people who make money selling houses are usually the banks. I tell them they will be in a position like a bank and earn a lot of interest on their property. I add it up and tell them how much profit they will make on the deal. For example, it’s a $200,000 house and I’m giving you 8% interest. That’s a monthly payment of $1,467. Let’s say I make that payment for 2 years. At the end of 2 years, on that $200,000 house, I’m going to owe about $197,000 or so. So, I’ll show you in a year, it equals $17,000 that I’ve paid you. If it takes me 2 years to pay you back, I will have given you $35,000 for your house and I still owe you $197,000. Let him know that you will end up selling that house for $237,000 because of my monthly payments and the amount due at checkout. Not the original $200,000 of the contract. Explain that this is how banks make their money. Tell him the actual dollars you will earn over a period of time.
On an interest-only loan, you will earn them interest every month. At the end of the loan, you will still owe them the full amount. If it’s a $250,000 house and they’re giving me an interest only loan on the house, I still owe them $250,000 every time I pay it off. So all I give them up front is money in their pocket. Be sure to tell them that the entire payment each month goes directly into your pocket, no matter when you pay it, I STILL owe you the full amount of the loan.
It’s a good deal for a seller. And it is the truth. This is how mortgage companies and banks make SO MUCH MONEY! That is why some investors stop investing after a period of time when they put a million dollars in their accounts and become hard money lenders. They become private lenders and make a lot of money for NOTHING!
In many cases, you will have a seller who will go with owner financing, but you need some money NOW. Point out to them that if you give them $20,000 now and pay the difference, they will have to pay tax on that $20,000 (again, double check with your accountant on this). Suggest this if the house is paid off: so they can save money, they can get a loan/mortgage on the house for $20,000 instead. You can put that $20,000 in your pocket right now. I will then make payments on that loan until we sell the house and I pay you in full. And right now, you don’t have to pay taxes on that $20,000. This is a great way if you want some money now.
Here’s a tactic that works and will continue to work. Once you get an agreement on seller financing for a house that sells for $300,000 and has a 5-year balloon, tell the seller that in 5 years or sooner I will pay you. If in the near future I have someone ready to buy that house, I will call the seller and tell him that he has some extra money, I offer to pay about $250,000 for that house RIGHT NOW. Guess what. That $250,000 today is better than $300,000 in 4-5 years, and you just won $50,000! If they counter offer for a little more, tell them you’ll think about it, wait a day or two, call back, and accept their offer. There are many ways to earn money in this business.
The bottom line is: MAKE AN OFFER. You have to believe that people are going to accept your offers. Don’t think for a minute that just because you may not own your home outright, many other people don’t. I am a homeowner in my own right. I can borrow money against it, I can rent it. In any case, make an offer. There are plenty of people out there who own paid homes, and they’re just sitting there. Make the offer, look them in the eye, bring them up, and watch them buy. Believe in yourself!