Real estate is all about leverage and self-storage is no different. You need to be able to obtain a loan to by a property, and the banker is an integral team member that makes the whole deal possible. But an easy way to make an end-run around traditional banking is to have the seller carry the financing. Not only does seller financing eliminate the stress and effort to find a bank, but it also saves you money on third-party reports, interest rates, and is typically non-recourse. So how can you get it?
Understand the benefits for the seller
Sellers carry the financing because it’s profitable for them. They don’t do it out of pity. They don’t do it because they’re stupid. They do it because it is the right decision for them financially. Let’s look at this in the form of a sample deal that costs $1 million and the seller has no debt. If they do not carry the financing, they have to pay income tax of around $300,000 and then they run down to A.G. Edwards and say “I have $700,000 to invest” and A.G. Edwards says “how much risk will you accept?” and they say “none” and they end up in CDs paying 2%. That’s $14,000 per year income on their $700,000. Instead, if they carry the financing and you put $300,000 down and they throw that in the trash, they end up with a $700,000 note at 5% which equals $35,000 per year income. Anybody would want $35,000 per year instead of $14,000. It’s not rocket science.
Be effective in communicating those benefits
Even though it’s 100% correct, you have to be proficient at explaining these benefits to the seller. Sellers are extremely turned off with “pressure” sales approaches, so it has to be low-key. One way to start the conversation is to offer two options at the start: 1) an all-cash purchase price and 2) a slightly higher “terms” price where the seller carries the financing. Another option is to say to the seller on the front end “have you considered the benefits of seller financing?” Approach this topic from the seller’s perspective. If you appear too “needy” of seller financing, it makes them think you are not able to get a bank loan because your have bad credit, etc.
Know the correct answers to the normal questions
When a seller carries the financing, there are some basic questions that always come up and you need to know the answers:
Q: What happens if you stop paying me?
A: You would get the property back and keep my down payment, at which time you could sell it again. You’d actually profit from me failing to pay you.
Q: What if I die before the note comes due?
A: Your heirs would receive an income-producing first-lien note and, if they want the cash, they could sell it on the open market. There are many buyers for first-lien notes.
Q: What if you screw the property up?
A: My whole goal in buying this property is to make money and to cover the mortgage. I will be putting in the effort to take it to the next level, not reduce its profitability. On top of that, I’m putting down 20% (or whatever it is) and there’s no way I could reduce it’s value by that much.
Don’t give up after just one discussion
If you pitch the concept of seller financing and they don’t take the bait, don’t think that’s the end of the subject. I have found it important to present the seller with a written comparison of all-cash vs. seller financing options (on a single sheet of paper) that they can look at and run by their spouse, accountant, etc. Sometimes you will find that giving the same information in a different manner does the trick. As long as you honestly believe it’s a good idea for the seller, you can sell it more effectively.
Buying a self-storage facility with seller financing is a great thing. It’s worth the effort to try to achieve this form of banking nirvana. And the good news is that it’s 100% correct for the seller to take this route.