I like making more than one offer to people because it shows negotiation without really budging. When you go in with an offer make the offer as appealing as possible, consider these 3 ways to negotiate on the price based upon the funding method.
2) Partially-owner financed
3) Fully-owner financed
- I can pay you $40k cash right now
- If you can do owner financing I can offer you $46k
- Or if you finance the purchase and the rehab acquisition of it I could do $52k
The first option, self-funding, doesn’t really apply in this money source scenario, but fully funded and partially funded scenarios are the ones I want to develop further.
In a fully seller financed scenario, the seller is financing 100% of the purchase price. The seller may not have a need for the cash as the property may be paid off in full, but the seller likes the idea of getting monthly payments that they may not otherwise receive.
I mentioned partially funded seller financing in one of my three offer strategies so let me explain a few different ways to go about doing this. The seller could fund part of the deal by carrying a second mortgage, they could fund the deal by “wrapping” the first mortgage, or they could take a second and third lien position.
Let me give you a scenario for a “wrap-around” mortgage…
Joe Seller has a $50,000 mortgage on his home and sells his home for $70,000. Jim Buyer puts $5,000 down and borrows $65,000 on a new mortgage. A wrap-around mortgage happens when the lender assumes responsibility for an existing mortgage. So now basically the new lender will make the payments on the old mortgage.
Some lenders like the wrap-around mortgage scenario because they can leverage the lower interest rate on the existing mortgage and gain the higher interest rate for themselves. Usually only assumable loans are wrappable which only really covers FHA and VA loans since they are both assumable without obtaining permission from the lender. Usually most fixed-rate loans carry a “due on sale” clause. This guarantees that the mortgage will have to be paid off in full when the property is sold. Seller wrap financing is only usually considered by a very motivated seller who is in some type of cash deficiency.
The Second and Third Lien offer, this is the last of the seller financing scenarios that I would recommend. In this situation the seller takes a second and third lien mortgage. This is the most creative solution in the bunch and allows for the seller to sell their second mortgage in order to realize cash yet still earn monthly payments from the third mortgage.
Another way to obtain a home is through an assumption of the loan. With the market crash a few years back, this provided a way for the investor to get a good deal by assuming the seller’s loan if the seller’s risk of default or foreclosure is imminent. Lenders may not go for this scenario as easily, but it does help both the seller and lender out if you are able to assume the loan and take over payments.
Through partial seller financing, the buyer may not have a sufficient amount of capital for a down payment for the entire loan through a traditional lending institution. This helps to close the money gap and ensures that the deal can get done, which is a win-win for both the buyer and the seller.
A seller finance strategy can payoff and allow you to secure a property with little to no money down. Approaching the owner with a seller financing offer is always a possibility. The owner may never have thought about this as an option, but may be in a position to make it happen which would behoove the both of you. If the seller owns the home free and clear then they really don’t have much to lose, but will gain monthly income as well as interest from the deal and it will yield him/her a higher rate than other types of investments.
There are pros and cons to seller financing.
The pros are:
- The seller may be able to defer any property gains tax and also realize a monthly income from your investment in the property.
- You make the purchase based on your terms and have little to no cash out of pocket (closing costs are also much lower since there is no lender to charge points, credit check, appraisal or loan origination fees).
- Faster closing and less qualifying!
The cons are:
- Not being able to sell the property right away (flipping it) if a prepayment penalty is established in the contract.
- The seller doesn’t get his/her money right away to be completely cashed out of the property.
- The seller terms may not be what you are looking for.