I will start this article by saying that I am not an attorney, and I am not giving legal advice, but here are a few points to consider when creating a seller financing contract.
Don’t copy and paste.
This is the first mistake I see people make when first considering the use of any form of creative financing. Google is not a lawyer. Don’t treat it like one.
Downloading a contract (of any kind) from the internet is fine, but it should be used for reference only. Always have a REAL attorney create any legal documents that you plan to use. If you do get a seller financing contract from a website, you can use it, but pay an attorney to “bless it” first. This will put their law license behind the document, not just you and Google.
Use the S.P.Y Technique©.
This is a concept I first introduced in my book Creative Cash. It stands for Seller, Property, You.
When using any form of creative financing like seller financing or a master lease option, you should craft the offer or contract in a way that creates value (or solves a problem) for the seller first, the property second, and you last.
This is the order in which you should create the offer or seller financing contract. Consider the seller’s desire/need to sell first. If the seller is not willing to work with you, you have nothing.
Next, make sure the offer solves any problems with the asset itself. This could be deferred maintenance, operational issues, lending issues, etc.
Lastly, consider yourself in the offer. If you reverse the order of S.P.Y and think of what YOU want first, you will fail in the vast majority of your creative financing attempts.
Down Payment vs. Repairs
In the many sellers financing deals, I have done in my 20-year multifamily career, I have used one technique more than any other when creating a seller financing contract.
Trade down payment money for the cost of needed repairs.
In most seller financing deals, you will need to put down some amount of money. I suggest that you determine the amount of needed repairs on the property (and the cost). Now you will want to negotiate the down payment to be minus any money you spend on repairs.
When financing real estate, sellers usually want the buyer to have some “skin in the game,” and that is why they ask for a down payment. Your job will be to explain how your investment into the asset will serve that purpose, but it will also help to limit the amount of cash you need to get the deal done. Win-win.
Price vs. Term
This is a simple concept. The higher the price the seller wants, the longer you need the financing to be (loan term). The reason for this is that you will need to exit the seller financing at some point. If you plan to refinance or sell, you will need time to allow the asset’s value to rise accordingly. This is especially true if the property was distressed to begin with.
Summary:
When creating a seller financing contract, use a lawyer and always create value with the offer. Consider the cost to you when getting into the deal and try to use creativity to mitigate the upfront need for cash.
For more info on using creative financing techniques for real estate investing, check out my site www.realestateraw.com.
Best of luck!
Bill Ham
