In real estate investing, making cash offers might seem like a straightforward path to securing deals. However, as Dedric and Krystal Polite discovered, cash offers alone often fall short—especially in today’s competitive market. With sellers hesitant to part with their properties at discounted rates, even when distressed, the Polites had to rethink their approach.
This blog delves into the reasons why cash offers get rejected and introduces the power of creative financing as a solution. By leveraging strategies like seller financing in real estate, Dedric, and Krystal turned repeated rejections into successful deals, providing a roadmap for investors aiming to close more deals in a challenging market.
The Problem with Cash Offers
Krystal observed a trend: despite their efforts, sellers frequently rejected their cash offers. The primary reason? Sellers are reluctant to accept offers that significantly undervalue their properties. Even with distressed properties, owners are often unwilling to sell for “pennies on the dollar.”
"Even if their property is falling down, they still are not going to give it away."
The Current Real Estate Market
Desric and Krystal needed a new approach. They decided to focus on creative financing to expand their options.
Housing Shortage and Affordability Crisis
The United States is experiencing a housing shortage, with estimates ranging from 3.2 to 7 million units, depending on the source. Combined with low affordability, the market is tighter than ever.
Post-COVID-19, home prices surged, creating a strong sellers' market. As of last July, the average U.S. single-family home price was $422,000, making homeownership challenging for many. Monthly mortgage payments on such properties exceed $2,000, which is unaffordable for most.
Inventory Supply
Currently, the market has around 4.1 months of inventory supply. This is a key indicator of whether the market favors buyers or sellers. A supply of fewer than five months typically indicates a sellers' market, which we've experienced for the past few years. However, as more properties are listed, the market gradually balances, favoring buyers in certain areas.
Real estate isn't a monolith; it's important to recognize local market variations. For instance, Dallas differs significantly from St. Louis or Jacksonville. Even within cities, neighborhood markets may vary, emphasizing the need to understand your local inventory.
Benefits of Creative Financing
Dedric and Krystal learned that relying solely on cash offers was limiting. They introduced creative financing as an alternative, which allowed them to present sellers with more appealing options beyond low-ball cash offers.
Making Two Offers
To ensure they didn't miss out on deals, Dedric and Krystal began making two offers for every property:
- A Cash Offer: Based on 70-75% of ARV (After Repair Value), minus repairs and profit margin.
- A Seller Finance Offer: Allows a higher-than-asking price with flexible terms, ideal for a competitive market.
For instance, on a $225,000 cash offer versus a $270,000 seller finance offer, they structured a $5,000 down payment with favorable terms that included no interest. This dual-offer approach often appealed more to sellers, enabling Dedric and Krystal to close deals successfully.
What is Seller Financing?
Seller financing involves the seller acting as the bank, offering a mortgage or deed of trust in exchange for monthly payments from the buyer. This method shifts responsibility for property maintenance to the buyer, providing relief to sellers burdened with property management.
Key Components
- Promissory Note: A debt instrument that includes a written promise by one party to pay another party a fixed sum.
- Deed of Trust: A legal agreement that uses the property as collateral for the loan.
If the buyer stops making payments, the seller can foreclose on the property, ensuring their investment is protected.
Benefits and Rules of Seller Financing
For the Buyer
- Little to No Cash Required: Minimal upfront cash investment.
- No Credit Check: Unlike traditional loans, there's no need for pay stubs, tax returns, or a strong credit score.
- Negotiable Terms: Flexible payment schedules and amounts can be negotiated.
For the Seller
- Steady Income: Provides a consistent monthly income.
- Relief from Property Management: Transfers maintenance responsibilities to the buyer.
Structuring a Seller Finance Offer
- Everything is Negotiable: From down payments to monthly payments and loan amounts, all terms are subject to negotiation.
- Evaluate Monthly Affordability: Determine how much rent you can collect, then deduct taxes, insurance, and other expenses to figure out a realistic monthly mortgage payment.
- Determine the Term: Negotiate the number of years you'll make payments, typically ranging from 5 to 30 years, with terms flexible to both parties’ preferences.
Tips for Presenting Seller Finance Offers
- Highlight Benefits: Emphasize the advantages of an all-cash deal, such as higher offers and flexible terms.
- Educate the Seller: Most sellers are unfamiliar with seller financing. Educate them by clearly outlining how it works and its benefits.
- Make It Attractive: Offer competitive down payments and favorable terms that appeal to the seller’s financial goals.
Closing the Deal
Creative financing has proven to be a game-changer for Dedric and Krystal Polite, transforming their real estate journey from frustration to success. Their shift from solely cash offers to a dual-offer strategy—incorporating both cash and seller financing—demonstrates the adaptability needed to thrive in today’s market.
Understanding and utilizing these alternative financing methods for real estate investors can open doors to profitable deals that might otherwise slip through the cracks. Dedric and Krystal’s experience highlights a crucial lesson: in real estate, flexibility and creativity are key to building a resilient and growing portfolio.
