Have you ever made a cash offer on a house, only to have the seller say no? It can be frustrating, especially when you think your offer is fair. The truth is, that many sellers reject cash offers because they believe their property is worth more. But there’s good news—creative financing can help you close more deals and give sellers options they’ll love. This blog will explore why cash offers often fail and how you can use creative financing to turn those rejections into opportunities.
Why Cash Offers Don’t Work
Many investors make cash offers based on how much the house will be worth after repairs called After Repair Value (ARV). They subtract repair costs and a profit margin, usually offering only 50% to 70% of the ARV. Sellers often think these offers are too low and reject them. This involves calculating:
- After Repair Value (ARV): The potential price of the property after necessary repairs.
- Repair Costs: Estimated costs to fix the property.
- Wholesale Fee: The profit you aim to make if you're wholesaling the property.
Why Cash Offers Get Rejected
Sellers’ Perception: Many sellers perceive cash offers as undervaluing their property. Regardless of the property's condition, sellers often prefer not to "give away" their property for what they perceive as "pennies on the dollar."
- Market Conditions: The U.S. housing market is experiencing a shortage of 3.2 million to 7 million units. This shortage, coupled with the aftermath of Covid-19, has driven prices up, putting sellers in a favorable position.
- Affordability Issues: The national median price for a single-family home is around $422,000, making it unaffordable for many. As a result, sellers are less inclined to accept low-ball offers when they know the market demand is so high.
How Creative Financing Helps
Creative financing means giving sellers better options. For example, seller financing lets the seller act like the bank. You agree to pay them over time instead of upfront. This can work for both sides.
Understanding Seller Financing
Seller financing is an agreement where the seller functions as the lender, offering buyers favorable terms to secure the purchase. Here's how it works:
- Promissory Note: A written agreement outlining the buyer’s commitment to pay a specific amount over a period.
- Deed of Trust: A legal document that provides the seller with a security interest in the property, allowing them to foreclose if the buyer defaults.
Benefits for Investors
- Little Cash Required: Investors can purchase properties with minimal initial investment.
- No Credit Checks: Traditional financial checks, like credit history and income verification, are often bypassed.
- Favorable Terms: Buyers can negotiate flexible terms that suit both parties.
Benefits for Sellers
- Ongoing Income: Sellers receive regular payments, which can be especially attractive if they don't need a lump sum of cash.
- Avoiding Property Management: Sellers no longer need to manage the property’s upkeep once it’s sold through financing terms.
- Security: The deed of trust acts as a fallback, providing the seller with means to reclaim the property if payments are not made.
Structuring Seller Financing Deals
When offering seller financing, it's crucial to structure the deal favorably for both parties. Here are some guidelines:
Down Payment
The down payment should be what the buyer can realistically afford and what the seller is willing to accept. Desric suggests:
- For properties under $300,000, a down payment ranges from $5,000 to $10,000.
- For properties over $300,000, a down payment of around $15,000.
Loan Amount
The loan amount is simply the sale price minus the down payment. For example, for a $400,000 property with a $5,000 down payment, the loan amount would be $395,000.
Interest Rates
A surprising insight is that many seller-financed deals can be agreed upon with 0% interest. A notable number of some real estate investors' deals carry no interest, making the payments purely principal.
Monthly Payments and Term Length
- Monthly Payments: Calculate based on anticipated rental income after subtracting taxes and insurance.
- Term Length: Typically ranges from 5 to 10 years but can be adjusted based on negotiations with the seller.
Negotiation Tips
- Everything is Negotiable: Don’t assume things are set in stone. Be prepared to adjust terms to find a mutually beneficial agreement.
- Ask Directly: Simple questions like “How much would you want down?” can provide significant leverage in negotiations.
- Deferred Payments: Propose deferred payments if you need time to renovate. For instance, requesting no payments for the first six months can alleviate the financial burden during property rehab.
Example of Offers
When presenting an offer, it's beneficial to give the seller two options:
- Cash Offer: A straightforward, no-strings-attached cash deal, which might be lower than the asking price.
- Seller Financing Offer: An offer that meets or exceeds the asking price but with terms that spread out payments over time.
Here’s a sample offer structure:
- Cash Offer: $225,000 as-is.
- Seller Financing Offer: $270,000 with $5,000 down and favorable terms for ongoing payments.
Benefits of Dual Offers
Offering two options allows sellers to see the benefits clearly: immediate cash versus a higher total payout over time. This approach can often make the higher-financed offer more attractive.
Transitioning from Cash to Creative Offers
Mastering creative financing opens up more avenues for acquiring properties and can be pivotal in building a robust real estate portfolio. By offering sellers more favorable terms, investors can increase deal closures and make properties more affordable despite market conditions.
Practical Steps to Transition
- Learn the Basics: Understand the key concepts of seller financing, such as promissory notes and deeds of trust.
- Practice Negotiations: Get comfortable negotiating terms that work for you and the seller.
- Explore Market Trends: Stay informed about local market conditions to tailor your offers effectively.
Conclusion
If your cash offers keep getting turned down, don’t give up! Creative financing can be a game-changer. By offering sellers more flexible terms, like payments over time, you can make deals that work for both sides. Start by learning the basics, practicing your real estate negotiation skills, and exploring your market. Remember, real estate success is all about adapting and finding solutions. Use these tips to grow your business and turn rejections into wins. Happy Deal Finding!
