Seller finance is where the seller becomes the bank and ‘loans’ you the money. These situations are not very easy to come by, but they provide us with a potential cash cow.
When to use it
A typical scenario that leads to seller financing is when you find a highly distressed property that has been run down over many years. The owner is struggling to sell the property because of its current condition and doesn’t have the money to renovate.
Seller financing is about partnering with the seller. For example, you could negotiate with the seller that you will invest the money required for the renovation while they still live there, and once the property is back to market value you can sell it together and split the profits. In this scenario you have spent R0 on purchasing the property and you have only invested in the refurbishment costs.
You can arrange with the seller that the profits are split 50/50 and, in this way, you have a very low entry into a deal with a potentially high profit. This is a win-win scenario as the owner gets to sell a highly distressed property at market value and you get a nice profit for minimal capital.
In these scenario’s it is incredibly important to have a solid contract in place. The seller is likely a stranger and therefore you cannot trust them yet. Also, you need to ensure that you are following the laws and regulations with lending money from someone. There are laws in place that require you to be registered with the FSP if you are lending money from a person directly. Speak to your attorney before moving on this strategy.
A real life example of seller finance
A student recently completed a successful seller finance deal. Her mom had recently passed away and her dad was forced to sell their home to cover legal costs and to downsize his lifestyle. It was a very difficult time for them, and she decided to partner with her dad. She told her dad that she would find a good buyer for him, instead of relying on estate agents.
With her understanding of property deal analysis, we structured a deal where her dad would walk away with a sizeable profit (after paying off the death costs) and she could make a profit from the sale. If he decided to work with an estate, he would’ve sold the property for around R1.1 million.
With her intervention they brought the value of the property up to R1.4 million. It wasn’t a huge amount of work. They needed to renovate the property for R100k. The house required a repainting of the rooms, retiling of the floors, renovating the kitchen and bathrooms and modernising the property in general.
She had the capital to invest in the renovations and her dad kept funding the monthly operating costs of owning the property. 3 months later they sold, and her dad made R150k more than he would’ve with an estate agent.
The power of seller financing is that you can use your money to upgrade the property, instead of spending it on the purchase.