How To Do Real Estate Deals with Other People's Money
(A Beginner's Guide to Seller Financing)
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Every time I talk about new projects, I get the same question:
“Marc, how are you doing deals right now? In this environment? In this economy?”
My answer is a simple 3-step blueprint:
Step 1: Shut the TV off.
Step 2: Don’t pay attention to anything political.
Step 3: Learn how to structure seller financing.
I can’t help you with Steps 1 & 2 — you’re going to have to figure those out on your own.
But seller financing?
Let’s make you an expert.
So… What is seller financing?
Seller financing is when the seller of a property offers the buyer a loan to buy the property instead of going through a bank or a lender.
(You might also hear it referred to as “owner financing”.)
Essentially, the seller acts like the banks, and you make payments to them over time. Based on my experience, the lender is often what slows deals down the most — so not having to work with a traditional lender can be a huge plus.
Why would you want to do seller financing?
A lot of reasons. But maybe most importantly, seller financing can help you get deals done in tough rate environments where capital is harder to come by.
Here’s why I like seller financing so much:
No Need for Traditional Bank Loans:
Like I said — the lenders are often the source of the biggest headaches. Seller financing lets you eliminate that headache and jump right into the deal.
Lower Down Payments:
Sellers are often more flexible than banks. You can negotiate terms that work for you, like a lower down payment. It’s great for if you don’t have all the cash for a deal.
Flexible Terms:
I always say that in deals, you either get your way with price or you get your way with terms. If the deal underwrites to the seller’s price, I’m happy to meet that price as long as I get my way with the terms.
Easier Access to Deals:
One of the biggest “A-ha” moments of my career was realizing how much bigger I needed to think. And once I realized seller financing could help me go bigger, it all started to click.
Why would the seller agree to seller financing?
Any time you’re negotiating, it helps to understand the other party’s angle.
Here are 3 reasons why sellers might agree to seller financing:
1. It can attract more buyers.
This is especially true in high interest rate environments. Seller financing broadens the pool of potential buyers for a property.
And that can lead to…
2. A higher sale price.
Of course, more buyers can help drive the price up. But buyers also might be willing to pay more for the convenience of not having to go through a bank or traditional lender.
3. Potential tax benefits
This varies deal-to-deal, but seller financing can allow the owner to spread their capital gains over the term of the loan instead of paying it all at once.
What are the risks of seller financing?
On the internet, people like to pretend that they have some special, secret way of making a whole bunch of money that no one has thought about.
That’s not the case with seller financing.
If you do it right, it’s a great way to get deals done in tricky environments without needing a ton of money.
But, of course, there are a few risks:
1. Higher Rates
Sometimes, a seller-financed rate could be higher than what you could get through a traditional lender. Sellers might charge a premium since they’re taking on more risk by financing the deal themselves.
2. Balloon Payments
Most seller-financed deals come with a balloon payment at the end of the loan term — meaning that after years of making monthly payments, you’ll owe a lump sum at the end. If you haven’t planned for this or can’t refinance when the balloon payment is due, you could be in trouble.
3. Due-on-Sale Clause Risk
In some cases, the property being sold might still have an existing mortgage. If the seller’s lender finds out they’ve sold the property using seller financing, the bank could enforce a due-on-sale clause, meaning the seller would have to pay off their loan immediately.
The best way to avoid this?
Do your due diligence — don’t assume anything.
4. Default Risk, Less Regulation and Less Protection
As the buyer, if you default on the loan, the seller could take back the property through foreclosure. Seller-financed deals usually don’t have the same protections as traditional mortgages.
5. Market Risk
If the property’s value drops over time, you could end up owing more on the property than it’s worth. Since seller financing doesn’t usually allow you to lock in the same kind of fixed-rate, long-term stability as a traditional mortgage, you can be more exposed to market risks.
Let’s Seller Finance a Deal Together
Alright, ready to see it in (pretend) action?
Here’s our deal:
The Property:
Location: North Dakota
Property Type: 16-unit duplex
Asking Price: $2.4 million
Appraised Value: $2.6 million
Negotiating Seller Financing Terms:
Instead of going to the bank, you sound the owner out about seller financing. You offer to put down 20% ($480,000) and ask the seller to finance the remaining 80% ($1.92 million) over a 10-year period at a 7% interest rate.
Here’s how the numbers look:
Purchase Price: $2.4 million
Down Payment: $480,000 (20%)
Seller-Financed Amount: $1.92 million (80%)
Interest Rate: 7%
Term: 10 years, with a balloon payment due at the end
Structuring the Deal
Next, you break down the monthly payment structure for the seller-financed portion:
Loan Amount: $1.92 million
Interest Rate: 7%
Amortization: 30 years
Monthly Payment: $12,776.42
The seller likes that they’re getting their asking price — and they’ve had deals fall apart in the past because of financing issues — so they agree to move forward with your terms.
You’ll pay the seller $12,776.42 per month for 10 years. At the end of the 10 years, you’ll owe a balloon payment of $1,635,845 to pay off the remaining balance of the loan.
Here’s the breakdown:
Monthly Payment: $12,776.42
Total Payments Over 10 Years: $1,533,170
Remaining Balance at Balloon: $1,635,845
Cash Flow and Strategy
Got the deal secured? Nice.
Now let’s look at the strategy.
Gross Rent: $1,500/month per unit
Total Monthly Rent: 16 units x $1,500 = $24,000/month
Expenses: Operating expenses (maintenance, insurance, property management, etc.) are estimated at 40% of the gross rent, or $9,600/month.
Net Operating Income (NOI):
Gross Rent: $24,000
Minus Operating Expenses: $9,600
NOI: $14,400/month
After paying the seller-financed mortgage ($12,776), you’re left with $1,624 in positive cash flow each month. That’s before you factor in any future rent increases or appreciation in the property’s value.
The Exit Strategy
At the end of the 10-year term, you’ll owe the seller a balloon payment of $1,635,845. But thanks to seller financing, you’ve gained equity in the property both from paying down the loan and from potential appreciation over those 10 years.
Ideally, the property’s value will have increased by the time the balloon payment is due, giving you a few different options:
Refinance: You can always get traditional financing from a bank to pay off the balloon payment if need be. With 10 years of ownership and rent increases, banks might be more willing to lend at better terms.
Sell the Property: Sell -> Collect the proceeds -> Pay the seller
Renegotiate with the Seller: This isn’t ideal, but you can always try to negotiate if the balloon payment is due and you’re not ready to pay it off.
And that’s that! Or, at least, scratching the surface of seller financing.
What questions do you have?
Feel free to drop them in the comments of the post and I’ll see how I can help.
P.S. Interested in talking to me about investing opportunities?
See you next week!
Circa $20k per year cash flow with a multi-million dollar property? The math’s not mathing for me.