Just under a year ago I joined a real estate education group called Renatus. I’ve been taking their online classes and meeting with other investors each week to learn more about generating wealth through real estate. Each person has a mentor who helps them through the process. My mentor’s name is Nate. He used to be a professor but switched to being a real estate investor once he realized how much potential there was in that field. He made over $300,00 last year and it’s only his first year seriously getting into real estate. To read more about how Renatus works and why I like it so much, read my post — Why I Joined Renatus.
Seller Financing Class
Each Thursday we meet for 2 hours to discuss deals and investing strategies. Nate is the teacher for the Seller Financing Class.
What is Seller Financing?
Simply put, seller financing is an alternative way to purchase a house. It doesn’t require a bank or a realtor, which saves both the buyer and seller money. It costs quite a bit to buy or sell a house in the conventional manner, but sometimes it’s hard to notice. After paying both the seller’s and the buyer’s realtors a 3% commission, paying for escrow and title services, and other closing costs, it can cost as much as 10% of the property’s price to buy or sell a house. Seller financing is a great way to go — it just takes a little bit of education to make it work.
Usually it means that the seller will take payments over time for the equity of their house. In other words, they act as the bank in the transaction. They receive interest payments every month until the house has been paid in full by the buyer and the ownership has been transferred.
What We Talked About
This week we talked about common sellers’ concerns, buyers’ and sellers’ benefits, how to talk to sellers, and how to find great deals.
Some sellers are concerned about having the mortgage in their name when they don’t live in the house. Oftentimes, this is actually very good for the seller. As the buyer makes payments on their behalf each month, their credit can improve. Long-term on-time payments look very good on a credit report. Also, these payments can be reported as income on the seller’s taxes after a year, which would help them to buy another house if they’d like.
Benefits for the seller
– Buyer’s payments prevent further credit damage for the seller or improve it if it’s already good
– Provides monthly cashflow
– Lower selling costs (3% per agent, 3% closing costs, title fees)
– Much faster (less hassle with contingencies like due diligence, appraisal, and financing clauses)
– They can sell as-is; no need for repairs or showings
Benefits for the buyer
– No need for a bank!
– Can negotiate their own terms (interest rate, loan length, pre-payment penalties, downpayment, etc.)
– Faster, lower selling costs (similar benefits to the seller’s)
Talking to Sellers
Because seller financing isn’t as common as traditional financing, when you talk to a seller as an investor you need to approach it carefully and patiently. You need to educate without offending them and make sure they see the benefits of being the bank.
Here’s the basic process that we discussed and practiced with one another:
1. Build rapport
2. Listen, listen, listen
3. Repeat and affirm their concerns
4. Resolve their concerns
5. Set another appointment
It’s not the funnest thing in the world to role-play but it was so effective to practice talking to sellers. After just one run-through with the person sitting next to me, I felt like I could confidently talk to sellers about seller financing their house.
How to Find Deals
A lot of investors just send postcards to people who might want to sell their home, like people in foreclosure or in tough situations. I prefer interacting with sellers face-to-face.
I’ve gotten in the habit of asking a few questions to my friends and colleagues:
– Who do you know that might be selling their home in the next 30 days?
– Is there anyone in your church, family, friends, or work that might need to sell?
– Who do you know that is in danger of losing their house in foreclosure?
– If you can think of anyone could you let me know?
Warm market is always best, but if you aren’t finding enough deals that way, you can find public lists of people who are in danger of losing their house and knock on their door. You have to be careful in this situation not to offend them or bug them. Just let them know that you are a local investor and you help people to get caught up on their house payments. Then ask them if they know anyone in the neighborhood who could use your help.
If they aren’t home, leave a nice note or business card with your information.
Seller financing is the best way to buy and sell houses. There’s a lot more you can do with this tool to save and make money, both as a buyer and seller. If you’d like to learn about our weekly classes, let me know!