Hey Reader,

Yesterday, I closed on my third seller financed triplex…all of which have been purchased from tired landlords. It’s kind of becoming my ~tHiNg~

By the way, it's Amelia here this week! 👋🏻👩🏻‍🦰

I know the topic of purchasing on terms (also known as creative financing) is intriguing, exciting, and maybe a bit confusing so I want to explain as many in’s and out’s of this deal as possible to help you better understand how a real-life seller finance deal looks.

Sourcing the Deal 🕵️‍♀️

This lead initially came to me in early 2024 through an email from the owner. One of the markets I invest in is a very small town in Iowa so it’s not a secret that people there know I own quite a few properties.

PRO TIP: Make sure you tell everyone you know that you’re an investor…you never know where a lead might come from! 🗣️

He let me know that he had a triplex he was looking to sell and wanted to know if I’d be interested in purchasing it from him. I believe he was initially looking to get around $200K for the property.

I toured the property and had a nice conversation with the owner. I like to “shoot the shit” with the owners while I’m there and try to get to the bottom of why they’re selling. We chatted for a quite a while and during that conversation it became apparent that he didn’t really need the money, he owned the property free and clear, and he was just tired of dealing with tenants.

He’s an older landlord and was very much doing things the “mom & pop” way. Picking up rent in person, not using a property management portal, getting taken advantage of by tenants with 6 “emotional support cats”. Basically all the things that eventually wear you down as a property owner if you don’t treat your investments like a business. 😬

After running the numbers as if I was going to purchase it on a conventional, 20% down commercial loan, I just couldn’t get the cash flow I was looking for. With interest rates, insurance premiums, utility costs, etc rising, I’m trying to be very conservative with my numbers right now. I’m also in a nice position where I don’t have to buy mediocre deals because I already have a small but mighty portfolio that provides me with nice monthly cash flow.

I let him know that the numbers were just too tight and I couldn’t purchase the property from him on a conventional loan at the price he wanted. I then asked him if he'd be open to seller financing but he didn't want to sell it that way (yet!).

No problem. I walked away and felt good about the decision.

Second Time’s the Charm 🍀

A few months later, I received two emails from the owner asking me different questions about how I self-manage my properties with such little effort. Unfortunately, I only saved the second of those emails and you can read below how the conversation went….

TLDR: I mentioned again that it sounded like he was really ready to let the properties go and I would be willing to purchase them but only if they were seller financed.

One question I often get asked if how do you explain the concept of seller financing to the seller? And the truth is, all of the seller financed deals I've done have been purchased from other investors. So they already understand the concept of seller financing and terms involved so little to no education is necessary on my part.

However, if they aren't familiar, I would just explain to them that they basically act as the bank and I make the down payments and monthly payments to them instead of a financial institution.

Here are the terms I initially offered him:

• PP: $150,000
• Down payment: $20,000 (13%)
• Interest only payments of $550/mo (5.1%)
• 3 year balloon
• Interest payments not to start until 2 months after closing to give me time to make repairs and fill the units

Here were the changes he wanted made in his counter:

• Down payment: $25,000 (17%)
• Interest only payments of $625/mo (6%)

I was comfortable with the increase in interest but let him know I was firm on the $20K down as I needed at least $5K to paint and make some cosmetic repairs to the property to get it up to my standards.

Here is what we up ended on:

• PP: $150,000
• Down payment: $20,000 (13%)
• Interest only payments of $650/mo (6% of $130,000)
• 3 year balloon
• Interest payments not to start until 2 months after closing
• No prepayment penalty in case I want to pay him off in full before the 3 year term is over

PRO TIP: Always follow up with potential leads after a few months. You never know if that extra time might have changed the sellers mind about what they’re open to. Whether that’s a lower purchase price or possibly even creative finance terms!

If you’re wondering why I opted for interest only payments instead of principal and interest, it’s because it gives me more cushion to cash flow on the property during the 3 years of the seller financed term. I already know the property is worth more than $150K (it’s assessed for $168K) and I could technically refinance it at any time but I’m waiting for interest rates to come down in the meantime.

This is also beneficial to the seller because he ends up getting more money for the property than the $150,000 purchase price. Remember, he originally wanted $200K for the triplex so this is a way to make it beneficial for both parties. If I pay him 6% interest ($7,800/yr) for the full 3 years, he will end up making $173,400 off this deal ($150,000 PP + $23,400 interest).

Here are what the numbers look like for seller financed vs conventionally financed:

The Future 🔮

I see a lot of questions about what a balloon payment is. A balloon payment simply means that I will need to pay the seller the remaining $130,000 in full within 3 years. The way I plan to do this is by getting a conventional mortgage from the bank.

In a perfect world, the property will appraise for $190,000 in the future. My small, local lender allows me to refinance at 80% LTV. In this case, I would refinance out $152K…which would pay off the remaining $130K due AND I would recoup my initial down payment, leaving me with no cash left in the deal!

If rates fall below 6.5% before the 3 year seller finance term is up, I will likely refinance at that time. If rates don’t lower, I can always try and re-negotiate with the seller at the end of the 3 year term, or sell the property.

PRO TIP: Always try to negotiate in a ‘no prepayment penalty’ so you aren’t penalized for paying off the seller early.

QUESTIONS FOR YOU:

1. What’s the biggest challenge you’ve faced (or fear you might face) when negotiating a seller-financed deal?
2. If you could learn one specific aspect of creative financing in more detail, what would it be and why?

Also, if you wouldn't mind doing us a huge favor this week. At WIIRE, we want to continue to provide you with content that you enjoy! Could you please take 2 minutes to complete this short, anonymous survey? We truly appreciate it!

Cheers,

Amelia

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