It’s exciting when you find a Seller who is open to doing Seller Financing with you! But there’s a huge and important difference between a Seller who WANTS to do Seller Financing, and one who is just WILLING to do it. The power dynamic and negotiation context is very different with each of them.
In this episode, Jeff describes the difference between these two types of Sellers, and how to approach each of them so that you can negotiate the best possible Seller Financing terms in your deal.
Congratulations! You have found yourself talking to a seller who is open to the idea of seller financing. This is a great situation to find yourself in. But I’ve got a question for you. Are they willing to do seller financing? Or are they wanting to do seller financing now maybe that seems like Potato-Potato, but it’s not? That’s actually a very important distinction. In today’s episode, we’re going to talk about the difference between sellers who are willing to do seller financing, and those who want to do it because it completely changes the game. From a negotiation standpoint. Let’s cue up the theme song and dive right into this important distinction and how you can use it.
Welcome to Racking Up Rentals, a show about how regular people those of us without huge war chest 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 are just looking for “motivated sellers” to make lowball offers to you see, we are people-oriented dealmakers, 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.
Thank you so much for joining me for another episode of Racking Up Rentals. Show notes for this one can be found at www.thoughtfulre.com/e82. Please do us a massive favor by taking just about a half a second to hit it, hit that subscribe button. In your podcast app, it really helps other fellow thoughtful real estate entrepreneurs find us. So thank you so much for that onward with today’s episode.
So when I am out in the world of talking to real estate investors, and in these days, that’s often Facebook groups and things along those lines, I often see posts that start with “Okay, I’ve got a seller, and they’re open to seller financing. Now, what do I do?” And the question that I always ask back is “Is your seller willing to do seller financing? Or do they want to do seller financing? Secondly, how did you find this little tidbit of information out? And who brought it up?” Now I know there are people listening to this you might go “Wow, that’s really getting nitpicky there, Jeff, are we splitting hairs a little bit too much?” But I’m going to make an assumption here that you want to not only secure a deal with seller financing, but you also want to negotiate the best possible terms that you can. And I’m here to tell you that if you do indeed want to negotiate the best possible terms, understanding if they’re willing to or if they want to, and the key differences between those is going to be very, very helpful to you.
Now, if you want to just think about it, in a very broad sense, what we’re really talking about here is an overall kind of power dynamic, who is doing who a favor. Now, to put it very, very simply, if the seller is willing to do seller financing, because they think that they can get a bigger win by helping you they’ve got more of the chips, right, they’ve got more of the cards, because they are doing you a favor. However, on the other hand, if the seller really wants to do seller financing, and by agreeing to their terms, you are helping them out just as much. Now you are doing them more a favor, or, of course, some perfect balance in the middle, which is the beautiful balance of it’s really good for both of you, you know, you know what he’s really doing the other one a favor per se, it’s just true alignment of mutual interests into one possible solution that is in the package of seller financing. So when we understand whether our seller is willing to do seller financing, or wants to do seller financing, we’ll find that there’s a huge difference in the dynamics of that situation and different levers that lead to different nuances of the negotiation, and different things that you can and should do in that negotiation yourself. In other words, to put it kind of in the parlance of the yeses framework that we talked about a lot on this show. These are two different sellers that you are solving, right, we always solve the person before we can solve the deal. And these are two different sellers, two different people, two different persons, some might say, to solve. So let’s just dive in and talk about each of these separately, quickly, individually.
So let’s talk first about the person who is willing to do seller financing. The person who is willing to do seller financing is open to that idea. But they are not yet committed to that idea. They think that there is a possibility that seller financing could be better for them in some way. Now, in some way part could be in a lot of different things. But they have this possibility in their mind that there’s some conceivable set of circumstances under which the outcome for them could be better if they were involved with seller financing. Now, they may or may not know what those circumstances are, they might not be able to even tell you directly in that moment. But there’s, there’s this little niggling idea in the back of their mind that this actually could be better for me somehow, if I were to offer seller financing.
So one thing that’s really, really important for us to understand, and this is really speaking directly to the overall gist of solving the person, whether we’re trying to solve them as a relates to seller financing, or any other aspect of understanding them. But what are their existing ideas and perspectives on seller financing? We kind of need to know this right? Do they think that seller financing is what you do when you can’t sell your property? any other way? Do they think seller financing is what you do when your buyer can’t come up with the money in any other way? And you really just want to get rid of this property? Is it what you do when you really want to juice your returns? So you’re getting paid the interest as well as the purchase price? What is their perspective and their idea on seller financing? And as we start to understand this, we start to get some insight into what they think might possibly be better for them. So ultimately, we need to find out, you know, under what conditions would they consider seller financing to be a better outcome for them. But we don’t want to ask them that directly. Because that starts to make it look like seller financing is the outcome that we want to happen. And one of our keys to our negotiation here is that even though we do have hope that this is going to turn into a seller financing deal, we don’t really want to show our cards and make it look like that’s what we were really hoping for.
So we want to find out under what conditions that would be a better situation for them. That would create a bigger win, to do seller financing, but without making it look like that’s the outcome that we are specifically rooting for. So the real question is what is most important to that? Right? And that’s the real question with every aspect of solving the person. But as it relates to seller financing, and their idea of what defines a win in the case of this transaction, what is most important to them, and if we can understand what’s most important to them, then that’s an important lever for us to use to help them see that that outcome might indeed be the very best option for them.
Now, by comparison, though, there are totally different sellers who want to do seller financing, I have definitely had sellers who the moment they called me back on the phone from receiving one of my letters said “Hey, I got your letter. And we’re we are wanting to sell this property and we want to sell it on a contract.” That’s usually the slang that they use. So this is a completely different animal. These people have already decided that seller financing is a better outcome for them. But the question is, is why? Why do they feel that? Why have they already pre-determined that that’s the way that they want to go? No, it’s usually one or a combination of a few different things. One of those things is they feel like that’s the right thing for them to do because of the capital gains deferral benefits that the installment sale structure might allow them. Some of them are feeling like that’s the way that they want to go because they want to continue to have an income stream. Some of them feel like that is the way they want to go because it will generate an overall greater return for them than just selling the property when they consider the interest that they might earn as well as the property sales price. They might want to do it because of other other related terms right? Maybe they feel like if they providing seller financing that they can get a larger down payment, or maybe they want a smaller down payment. Or maybe they have some other particular unique terms that are very specific to them.
So at any rate, what’s important to them is something that they’ve already decided, because if they didn’t know what was important to them, they wouldn’t have gotten so far as to say, I know for sure I want to do seller financing. So once you know what is most important to them, and you once you understand what it is, that makes them want to do seller financing, now, you have some additional leverage, because now you can be the person to give them the thing that they want the most. And then you can adjust the other dials in your own proposal in order to emphasize them getting what they want, but then adjust these other elements of the deal so that you get more of what you want.
Let me give you a simple example. If you meet the seller, and I’ll give you a real-life example, I’m just going to refer to the people who I was just mentioning a moment ago, I sent them a letter about their fourplex. And they called me back and right in the very first conversation, they said we want to sell it, and we want to sell it on a contract. So as I spoke with them further, it became very clear very quickly, that they wanted to sell with seller financing. Because of capital gains, deferral goals, they’re just at an age where they wanted to get rid of the property and not be in the landlord business any longer. But they didn’t want to have to do a 1031 exchange. And they certainly didn’t want to pay capital gains. So I knew that was their most important thing. And that meant that I was then able to negotiate with them for other terms that were important to me that fit within the context of their desire to defer capital gains. For instance, this was a tool for me to negotiate a smaller down payment, because it was going to be clear to them that the larger the down payment, the more of an initial capital gains hit, they would have.
Secondly, it allowed me to negotiate for interest only payments, so that they didn’t have monthly bit of capital gain coming back to them that they would then have to pay the bill on. It also allowed me to negotiate for the ability to substitute the collateral for the note in the future if I wanted to, so that they would not get paid off early and unexpectedly if they want. This is part of what we call supercharged seller financing. At any rate, truly understanding what was most important to them. In this case, capital gains allowed me to do a better job of crafting a proposal that actually worked far better for both of us.
So to recap, and to put it simply, there’s a big difference between somebody who is willing to do seller financing and someone who wants to do seller financing. When you’ve got someone who wants to do seller financing, you are valuable in the sense that you are giving them what they want. And that helps give you more power in the overall dynamic. If you have somebody who is willing to do seller financing, you don’t naturally have quite as much power in that negotiation dynamic until you can help them see that they actually might want to do seller financing in which case now you are the enabler of the thing that they want and that gives you power.
That is it for today’s episode of Racking Up Rentals. Again, show notes for this episode are at www.thoughtfulre.com/e82. Please do us a big favor by hitting that subscribe button in your podcast app and rate and review the show. I would really, really appreciate that.
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Thanks for listening to racking up rentals where we build long term wealth by being win-win dealmakers. Remember solve the person to unlock the deal and solve the financing to unlock the profits.