Seller Financing in the Changing Market

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It’s no secret—the real estate market is currently changing. After a few years of a strong Seller’s market, the market is currently balancing itself out. Many people are now exclaiming, “we can finally get Seller Financing again!” And it’s true that Seller Financing is quickly become a more and more accessible tool. But it’s important to understand that Seller Financing was always a great tool—even in the Seller’s market. In this episode, Jeff explains the changing role of Seller Financing in today’s market.

Episode Transcript

You know, I’m seeing a renewed and increasing interest in seller financing these days, which is awesome. I’m such a big advocate for it. I’m happy that anytime people are excited, but what I’m hearing people say is things like, you know, seller financing is back. It’s possible, again, because the market is changing. And I just want to take a moment in this episode to dissect that, because I think that that is true. But was it ever gone? And as we look at this, we see there actually two categories of reasons why seller financing works. One that’s been true all along, and then one that’s sort of newly true again, with the changing markets. So let’s keep the themes on we’re going to jump right into this and understanding the dynamics of seller financing, and how they relate to today’s evolving market. Welcome to racking up rentals, a show about how regular people, those of us without huge war chests of capital or insider connections can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans. Nor are we posting WE BUY HOUSES signs, we’re just looking for quote, motivated sellers to make lowball offers to you see, we are people oriented deal makers, we sit down directly with sellers to work out Win Win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the thoughtful real estate entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio. Hey, thank you for joining me for another episode of racking up rentals. This is Episode 165, which means show notes can be found at thoughtful our e.com/e 165 Please do us a big favor by hitting the Follow button, the subscribe button whatever it’s called in your particular podcast app, it really makes sure that you of course, don’t miss any episodes. But it also sends a message back to those platforms that shows them you’re listening. And you liked the show. And it helps them want to spread the message to other fellow thoughtful real estate entrepreneurs like you who deserve to find this show to you. Thank you for doing that. Onward with today’s episode. Well, it’s not any breaking news to tell you that our market is changing. Now markets are very local and regionalised. There’s really no such thing as the real estate market sort of as a whole. But there’s a lot of smaller real estate markets in each geography. And those markets are kind of categorically changing right now. Most people would say that we have gone from a seller’s market to more of a balanced market in the last few months, some would say that it feels like it’s become a buyers market, I think probably Data Wise, technically it’s become at this time anyway of recording more of a balanced market than a buyers market. But anyway, the point is, it feels like it’s changed a lot. And that’s just the simple truth that you can see just through your own anecdotal observation. So why has it changed? Well, I think the answer to a question like that is always probably, you know, deep and multifaceted and nuanced. But I would simply say that one of the big reasons is that mortgage interest rates are going up. And by up I mean quite a bit up historically, nowhere near their highs, but comparatively to where we’ve been in the last several years, much, much higher. And that means affordability for homeowners, has suffered, right, if you had $2,000 a month to spend on a mortgage payment. A year ago, you could buy a lot more house than you could buy today with the same $2,000 budget for your mortgage and that sort of affected prices. And it’s really slowed down the overall transaction volume. But this is not a show about technical analytics or prognosticating the future of the real estate market or anything like that. This is a show about negotiating off market relationally with sellers and working towards getting seller financing. So what I’m hearing a lot of people say these days, is they’re saying things like Oh, thank goodness. Now we can finally get seller financing deals. Again, it was impossible for these last few years because it’s been such a seller’s market, but now it’s possible again, and when I hear them say that I’m happy that they’re excited. But there’s part of me that feels a little bit of that nails on the chalkboard kind of experience. Because it’s really not true that seller financing wasn’t available before and I feel like if you understand why seller financing was available before and understand why it’s available now. It helps increase our understanding of the whole topic in a way that really improves our education and improves our ability to be great investors. So, I want to talk to you today about the role of seller financing because it is changing. But it’s adding new elements to what was already true before. So I want to talk with you about two kind of categories of reasons why seller financing works, the first category that we’re going to talk about is the reasons it has always worked. These are the timeless reasons, these are the universal reasons that are not market dependent at all. These are the reasons why seller financing was great a year ago, two years ago, three years ago, and will be great five years from now, regardless of what’s happening in the market, five years from now, but then the second category

is the newer reasons, or I should say new again, these are the timelier reasons why seller financing is relevant today. In this particular market. These are the market driven reasons, these are the reasons that come and go as the markets change. They’re not universal, but they are true in this exact moment. So let’s start with the first category. These are the reasons why universally on a timeless basis. seller financing is a great tool. These are the reasons that all the people saying oh, great, now we can do seller financing, again, apparently haven’t understood completely, because they would have realized if they understood these reasons that it had been possible, all along. Reason number one is that regardless of what type of market we have, or market cycle, or interest rates or anything like that, there are always people who own pieces of real estate, who if they were to sell that piece of real estate, would experience a big bill for their capital gains tax. And some of these people are not excited about paying that tax. And they’re not excited about the primary method people use to defer the payment of that tax, which is a 1031 exchange. So anyway, a more simple way to say that is they’re always people who are, let’s say, turning 70, who have a rental property or two. And it’s been great to them, they’ve seen a lot of gain, but they’re at a point now in their life where they kind of want to spend their time differently. They want to travel, they want to go see their grandkids, they want to play more golf, whatever it might be. And so they don’t want to do a 1031 exchange, because that just means trading one responsibility for another responsibility. And they’re looking at the ability, their ability to purchase a property and looking at interest rates today for purchases, saying I don’t think I really want to go into the market trying to buy a piece of property with, you know, 6% 7% interest rates, or whatever it might be. There are always people like that. And those people are very, very, very well served by a nicely thoughtfully structured, installment sale, which is a type of seller financing. That helps them avoid the pain of that capital gains bill without needing to go find another property to buy in a 1031 exchange. Secondly, there are always people who own a property, because it gives them income. And if they were to sell that property, then poof, there goes the income and they don’t want the income to go poof, they might not want to own the property anymore, but they don’t want the income to go away. And sometimes that feeling of I don’t want to lose this income stream makes people hesitant to sell their properties. That’s true always, no matter what the market conditions are like no matter what the interest rates are like, and when we find those people, we can serve them well with a seller financing proposal. And then the third category is that there are always people who if they were to just bite the bullet, pay the tax, and get a big lump sum of money in you know, wire transfer after closing, they wouldn’t know what to do with it. And they wouldn’t be real excited about the sort of burden of going out into the world and trying to find something useful and safe to do with it. You know, in a, in a market like we have right now also, not everybody’s really excited about the stock market. It might seem a little volatile, it might seem like it’s trending in the wrong direction. There are always people who just don’t really like things like the stock market, so they would get this big lump sum of money, they wouldn’t know what to do with it. And so seller financing serves those people very well because it gives them a way to continue to have their money working for them, but without giving them a new project which is to go out and figure out how to put the money back to work. So those are three reasons for this first category. This is why seller financing has been awesome all along. This is why even a year ago two years ago and what felt like a strong seller As market, selling financing was still amazing for people exactly like I just described, who had capital gains, deferral needs and wants and concerns, wanted to continue to have income, didn’t want to have to figure out what to go do with cash, those people are always there, no matter whether the market is up or down or sideways, or whatever. So let’s now talk about the second category, though, of reasons why seller financing makes good sense. This is the category that’s much more timely to right now in this moment. And mid 2020, to late 2022. These are the reasons that are timely, not timeless, that are market driven. And this is what most people who are saying today, oh my gosh, it’s so great. We can do seller financing. Again, this is what they are focused on. This is what they thought was required in order to get seller financing deals done. And they’re happy, because these reasons are back again. And that’s great. But unfortunately, they’ve been kind of missing the point all along that they could have been doing seller financing deals over the last few years. But let’s talk about the second category to the reasons that are timely for today. Right now, if you have a property that you want to sell, that might be difficult, it’s not universally difficult. It’s certainly varies from product type to product type neighborhood to neighborhood market to market, but it’s categorically speaking, generally speaking, more difficult than it was a year ago. And that because that process is difficult, if you are a seller who is willing to offer seller financing, I always get this image in my mind of like WD 40, you know, the the stuff you spray on a squeaky hinge, it’s like a lubricant, that just sort of makes everything run a little bit easier. If you are willing to be a seller financing seller, it’s like spraying WD 40, all over the potential sale of your property, you’re just going to kind of grease the wheels of all the aspects of the sale, right. So maybe there’s somebody who has a property that they want to sell, but they’re having trouble selling it, or they’re, they’re anticipating having trouble selling it in the future when they go to list it. So by offering seller financing, they feel like they’ll be able to sell a property that they might not otherwise be able to sell. Similarly, but slightly different. If they have a property that they will offer seller financing on, they might perceive that seller financing is something that will help it sell faster, right. So instead of being on the market for four months, now maybe they feel like they could sell it in one month or two months, if they offer seller financing. So that’s a motivation, potentially for some of them as well. The other third reason that kind of related to both of these also is they might feel like they might be able to sell it for more money at a higher price. If they offer seller financing, right, because if they offer seller financing, in many ways, they are removing what might be the number one barrier for their whole buyer pool, which is their ability to qualify for a reasonably priced loan. If everybody who’s can considering being a candidate for buying this particular property has to go to a bank and can only get access to a six and a half percent loan by the seller offering you know, maybe a 5% loan, then that kind of greases the wheels and sprays WD 40 on their ability to sell the property and maybe then the buyer is willing to pay more in exchange for having easier and better financing. So I want to now just compare and contrast categories one, and two. Category One, again, was the timeless universal reasons why seller financing can make great sense. And number two is the more timely market driven reasons. I want you to observe something important in category one, the timeless reasons those sellers want to do seller financing, now they might not want to do it at the very beginning of your conversation with them because they might not yet be fully aware of it. But ultimately, once you have kind of had a conversation with them and have gently educated them in a way that helps them understand their situation better. They actually do so very willingly. They

say thank you for helping me understand that this is a possibility this does meet my needs a lot better and they do it very, very willingly and voluntarily. In category number two, the more timely reasons that are market driven, oftentimes those sellers are willing to do seller financing willing to is very different than want to though. People who want to do it really feel like it is clearly in their best interest. People in category number two who are simply willing to also feel like it’s in their best interest but they wish it wasn’t there’s a sense Generally speaking of reluctance with those people, they’re like, oh, okay, I will do that. I kind of wish I didn’t have to. But yeah, it’s better than the alternative. So I’ll do that. But it’s a little bit begrudgingly, it’s a little bit, reluctantly. And here’s what I want you to take away from this. If you can get a deal done, using the motivations of either category, the timeless, universal motivations that were true five years ago, or the ones that are more true right now, a seller who, you know, a year ago wouldn’t have said yes to this. But now they would. If you can get a deal done either way, I applaud you. And I hope you will do that. But what I want you to understand is that the best deal, the best terms, the best negotiated terms and elements and what I call supercharged seller financing, the best deal in seller financing will always come from the person who is in category one, the person who wants to do seller financing, because you have made it clear to them. And they’ve come to their own conclusion that this is really, really a good thing for them that scratches all their itches and meets all their needs. Not the one who is simply willing to do it, there’s a big difference between a seller who wants to do seller financing, after you help them see that they do. And someone who is willing to willing to is good enough, but it is always inferior to that category of people who want to. So it’s not my friends that there are different reasons today for seller financing than there used to be. There are just additional reasons that are true today that weren’t true a couple years ago. Category number one. All those reasons were absolutely true. A year ago, two years ago, five years ago, 10 years ago, 40 years ago, there’ll be true 510 years from now. Category Two, it’s very timely, we’ll have to see where the market goes. Some of these reasons might dissipate in the future, or they might not. Either category is great, but you’ll always be able to negotiate the best terms when you find the person whose needs are actually met so much better by selling tea with seller financing because it helps them to further capital gains without doing a 1031. It helps them continue to have an income stream. And it prevents them from having a project where they need to go out and figure out how to redeploy their capital to put to work for them. That is it for today’s episode of racking up rentals. Thanks again for joining me for this one. Again. shownotes. Here can be found at thoughtful rt e.com/e 165. Please do us a big favor by hitting the subscribe button in your podcast app or the Follow button and rating and reviewing the show rating and reviewing is probably the most important thing you could do. And I’m so grateful when you do. Did you know that we have a Facebook group for thoughtful real estate entrepreneurs as well. It’s called rental portfolio wealth builders. We’d love to have you join us over there. Just go to group dot thoughtful rt.com on your browser, and you’ll be taken right to that page and you can hit the join button. So I’ll see you in the next episode. Thank you for being here today. Until then, this is Jeff from the thoughtful real estate entrepreneur signing off. Thanks for listening to racking up rentals where we build long term wealth by being a win win deal makers. Remember solve the person to unlock the deal and solve the financing to unlock the profits.

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