Get Seller FinancingPosted on January 24, 2014 by
Buying and rehabbing distressed properties can be a lucrative business but it can also be risky. Rehabbing and flipping often generates quick checks but may also take some upfront cash to get the deal done. Here are some tips for rehabbing property with seller financing so you keep more of that cash in your own pocket.
If a property is in need of repairs or it won’t cash flow at the price the seller is asking then you may have difficulty getting a bank loan for the deal. Get the seller to finance the deal. Create an offer that will give the seller the price they need but only if they will carry back the loan on the property in a first position mortgage.
If a seller will carry back the loan then you will likely need to pay the asking price or close to it. Your offer must create value for the seller. The majority of the time when a seller carries back a note on a property they are usually more concerned about the price they are getting than the terms of the loan. This can be in your favor. Create an offer that is close to or at full price but with an interest rate and terms that will allow for small payments and bigger cash flow. One example would be making a full price offer with interest only payments. The full amount of the loan would be due when you sell or refinance the property. The risk here is that you don’t pay down any of the loan amount but it would be much easier to cash flow. This works well if the market is appreciating quickly. You can cash flow the deal and then flip it in a few months for a big check.
Getting the cash to fix up the property can also be a challenging part of fixing and flipping deals. If a seller will carry back financing on a single family house, you can make an offer that will allow you to use any down payment money toward the rehab costs. This keeps you from having to put cash down for the seller financing and also needing more cash for the rehab. You will need to explain to the seller that if you default on the loan then their property will be in better shape than when they financed it for you. You will have spent the down payment money fixing up their house.
If you are dealing with a multifamily property that has units that need rehab, then a good offer would be to have the seller waive the first few months’ worth of payments. Now you will be able to collect rent from some of the units and use it to repair the others. The idea here is to get as many units fixed up with rent money you collect from the property.
There are many sellers out there who are willing to finance deals for lots of reasons. Your main goal is to make an offer that solves a problem for the seller. The more value you can create for a seller the more likely your offer is to get accepted. The more work a property needs then the more a seller should help you get the deal done. Don’t be shy about asking a seller to help you solve a problem they have and that you didn’t create. If their property needs rehab, get seller financing.