How to Sell a Seller on Seller Financing

There will come a point in your business when the most challenging part isn’t finding deals; it’ll be sourcing the funds to pay for those deals. Don’t fret. That’s a wonderful place to be! Today, I want to talk about one way to creatively fund your deals: seller-financing.

In a nutshell, seller (or owner) financing means that, instead of going through a bank or a private money lender, you get the seller of a property to agree to carry the note for your financing.

The mechanics are similar to a conventional loan, but the seller serves as the lender.

From a buyer’s perspective, there are plenty of reasons to go after this type of funding arrangement:

 

1. You don’t have to worry about strict qualification guidelines.

2. You can avoid the typical origination fees that come with a bank loan.

3. You’ll have the flexibility to negotiate better terms.

4. You can pass on the usual headaches that come from loan underwriting.

5. You can close much more quickly than with a regular loan.

 

That all adds up to one compelling case in favor of seller-financing. But, my purpose today isn’t so much to sell you on the advantages of getting a seller to finance your next deal.

Instead, I want to equip you to convince a seller that loaning you the funds to purchase their property would actually be a better choice for them.

A Quick Note on How to Approach the Conversation

Notice how I said I’m going to show you how to convince a seller that this would be right for them. If you’re going to pull this off, then you have to begin with the honest conviction that seller-financing is, in fact, a smart option for the seller.

If you’re looking for someone to teach you how to pull the wool over some unsuspecting seller’s eyes, then you’ve come to the wrong place. I sincerely believe that getting a seller to carry a note for you can genuinely be their best course of action and often in their best interest.

Why I believe that will become clear as we go.

All that to say, when you interact with a seller—from the very first time you make contact until closing day—approach from a standpoint of mutual value.

Honestly seek to create a win-win scenario at every point.

Build rapport by taking a genuine interest in their specific situation. Identify pain points—areas in their life that would be genuinely enriched by selling you the property as quickly and painlessly as possible.

Offer solutions that solve their problems, not just your own.

If you can build the relationship on those grounds, the owner will be far more open to a conversation about seller-financing.

 

Three Key Benefits to Seller-Financing for the Property Owner

Before you start the conversation, you need to get crystal clear on the specific value you have to offer by proposing a seller-financed deal. Otherwise, you won’t get very far with your seller.

To that end, here are the three key benefits a seller can expect from this arrangement.

1. Speed – Without the red tape of financial institutions, you can close a seller-financed deal just as soon as you can complete your due diligence. For a seller, this means a quick and painless closing whereas a traditional lender-financed deal could take weeks or months, especially if there are problems in underwriting or appraisal.

2. Tax Advantage –For sellers who’ve owned their property for more than 27 years, their tax basis will be all but gone. That means Uncle Sam’s going to take a big bite out of their profit on this sale. If on the other hand, the seller agrees to finance your purchase, then they’ll only be on the hook for taxes on the mortgage income they bring in each year. This is a huge benefit for the seller.

3. Cash Flow – A monthly mortgage payment from you means guaranteed cash flow for the seller. And monthly check comes free of all the usual work that goes into managing a property. For them, it’s purely passive income. This income is usually significantly more than they would earn from a bank or bond.

How to Explain Seller-Financing to the Seller

Talk about Benefits, Not Features

This is Sales Training 101. When you’re talking to the seller about carrying a note on the property, the last thing you want to do is frame it as a ‘favor’ to you. If you were paying attention a few moments ago, you’ll know that seller-financing looks a whole lot more like a favor for them!

That said, focus on explaining the benefits clearly and concisely. Do your homework. Be ready to answer questions. Even sketch out an example using real numbers to help show them how the deal will work for them.

I’m going to give you an example of what that looks like in just a few minutes, but before I do, I need to say a few things about potential objections.

Proactively Address Objections

 

Sellers are going to raise questions about and objections to your proposed funding arrangement. Don’t see these as deal breakers. Instead, take them as opportunities to keep the conversation going and provide additional assurance.

I’m going to give you three of the most common objections I hear along with a few ways to get out in front of them.

“What if you were to pass unexpectedly?  How would I be protected?”

Fair enough. The seller wants to know what happens if I pass away. Will they have to deal with a family member or executor? How will they ultimately get paid?

For this one, I pledge to take out a term life insurance policy on myself with a death benefit sufficient to pay off the balance of the loan and direct that the funds only be used towards that end.

 

“How do I know you’re not just going to run the place into the ground and then disappear on me?”

Again, this is a fair question. The last thing a seller would want is for you to purchase the property using their financing, run it into the ground, and then leave them holding onto a dog of a property with little to no prospects of reselling it at market value.

To help alleviate the seller’s concern, you can structure the deal to include a management provision stating that, if the occupancy of the property were to fall more than 15% below its current rate, then the seller could call the note to be paid off within 90 days.

 

“What if I decide I don’t want to be a lender anymore?”

The owner may get 5 years down the road and decide he doesn’t want to be a lender anymore. Maybe he just wants to take the lump sum—taxes and all—and go retire someplace sunny.

That’s fine. There’s no reason why he wouldn’t be able to do that. What I’d do in this case is connect him with a mortgage broker to talk about possibilities for selling the loan in the future. There are investors out there who’d gladly buy the note for the right price.

Sketching an Example

 

Here’s a script of what you might say to a property owner. For the sake of this example, we’ll assume he purchased the property 30 years ago for $500,000 and is currently asking $3 million for it. You’ve done your homework decided that’s a fair price.

Mr. Seller,

There is not much you can do to prevent the IRS from taking a substantial chunk of your capital gains. That said, you stand to net about $______(65-70% of their net) after taxes and fees if you decide to sell the property outright.

Let’s say you do decide to go that route. To be safe, I’m sure you’ll want to park the money in a fairly protected investment vehicle—probably a CD or money market. If you’re lucky, your high volume will earn you a premium rate of about 2% in interest. That makes for $________ a year in interest income.

But…If you work with me,  I will pay you 3,4,5 or 6% interest and you will only pay taxes on the amount you receive each year. Your payment from me will be $_______ which as you can see if 3-4 times what you would get from the bank

We’ll be able to close in two weeks, possibly sooner, so long as I can complete my due diligence on the property and you can verify my credit-worthiness. That’s a much safer and faster option than trusting a buyer with the hassles of conventional financing.

As long as you and I are bound together by this note, our arrangement will be secured by this $______ property. What other investment vehicle could you find that will back up their promise of a $________per year return with a $______ guarantee as security?

Thanks again for taking a look at this. As you can see, we both have quite a bit to gain from this arrangement. Is all of this clear? Are there any specific questions I can answer for you?

Conclusion

 

 

Of all the creative ways you could finance a deal, seller-financing is one of the most attractive. It gives both sides—buyer and seller—plenty of reasons to walk away from the deal feeling like they’ve won.

More importantly, it gives you one more tool in your bag to make sure you never have to pass on another deal because of trouble with financing.

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